The market has found a new equilibrium

“The market has found a new equilibrium,” said Johannes Martin Hartmann, chief executive officer and chairman of the board of directors at VIG Re, while discussing the prevailing market conditions.

Hartmann expressed satisfaction with the company’s performance in the first half of 2024, despite ongoing extreme weather events around the globe.

He mentioned specific events such as the severe flooding in southern Germany, as well as heat waves, severe convective storms, and last but not least Beryl, the earliest category 5 Atlantic hurricane ever on record, but noted that these were so far manageable.

“Despite these events we are quite pleased with our performance in the first six months of the year, as the burden from large losses remained within our budget,” he added.

“It’s no secret that we have come out of a soft reinsurance market. The reinsurance market has started to report solid results and remains bullish on market outlook.

“At the moment, reinsurers are eager to report positive results in order to re-establish the trust of their investors lost during the soft market phase,” he explained.

He acknowledged that market conditions in US cat are flattening out, even showing first signs on risk-adjusted rate reductions for loss-free programmes, but that nat cat terms are widely seen as attractive for reinsurers, who are consequently willing to deploy more capital.

A new equilibrium

Addressing the main challenges in the reinsurance market, Hartmann discussed the relationship between insurers and reinsurers.

He explained that the poor performance of the reinsurance industry in past years had prompted in 2023 not only changes in reinsurance rates, but also a shift of retention levels and a refinement of reinsurance contract wordings, achieving more clarity on what is covered and what is not. 

“In my view, we have found a more healthy equilibrium in how the losses are shared between reinsurers and cedants,” Hartmann said. 

“This is also why in 2023, although we again were facing a very high frequency of extreme weather events, most reinsurers reported solid results. Many reinsurers have been redefining their underwriting appetite, walking away from providing frequency covers, hence focusing on protecting the capital basis of their clients instead of mitigating earnings volatility.” 

Hartmann highlighted the challenges on the reinsurance landscape.

“We have to acknowledge that the risk landscape is evolving fast. The most prominent example is the impact of climate change on weather-related catastrophes. Completely new kind of risks are emerging from the digitisation and connectiveness of our societies, as we experienced with the CrowdStrike IT outage in July,” he said.

“Our industry has to find proper answers for these evolving risks in order to stay relevant for society and to reduce the—in my opinion ever-widening—protection gap.”

Capital challenges

Discussing factors sustaining hard market conditions, Hartmann pointed to the basic economics of supply and demand.

“The abundance of capital led to an oversupply which was in my view the main driver for the soft market.” 

“It’s always a question of supply and demand: the good news for the reinsurance industry is that demand is on the rise, driven not only by inflationary factors but also by a greater awareness of evolving risks. The future development of the supply side however depends on external factors,” he said. 

“Until 2022, during the low and even no-interest environment, capital was so cheap that investors turned to reinsurance as a non-correlated asset class. The abundance of capital led to an oversupply which was in my view the main driver for the soft market.”

Now, Hartmann notes, new reinsurance ventures face challenges in attracting capital. “We have not seen something anything like a ‘class of ’23’. There have been a few attempts to establish new reinsurers, but none has been successful so far in getting funded,” he said.

“On the other hand, the insurance-linked securities (ILS) cat bond market is booming, and appears more attractive to institutional investors aiming to diversify their portfolio through insurance risk. 

“Cat bonds and other forms of alternative risk transfer promise to be more transparent on the assumed risk and are more fungible than an equity investment into a reinsurance firm. Therefore, more reinsurers are embracing ILS as part of their business model.” 

Another challenge for the industry is attracting talent, as Hartmann explained. “Finding experienced and qualified underwriters or actuaries is becoming more of a worry. We are in a competitive situation with other industries, and it is crucial for re/insurance to attract strong talent and to demonstrate that the sector is actually a fascinating place to work and grow,” he said. 

Orderly renewal season ahead

On the upcoming renewals Hartmann commented: “Our clients understand that reinsurers have to make a proper return on the risk they are taking in order to be able to act as a long-term partner. 

“In my view, the market has found a proper equilibrium in most areas, with a need for fine-tuning in some details. For most of our business, I do not foresee any significant further tightening or softening of reinsurance terms.” 

Discussions during renewals will touch topics such as PFAS chemicals, strikes, riots and civil commotion and the new European Sustainability Reporting Standards (ESRS). 

“A challenge we will have to cope with is ESRS, with the requirement to gain more data insight in the environmental, social, and corporate governance aspects of our clients’ portfolios,” he added. “Especially when it comes to data and methods for treaty portfolios, we are just at the beginning.” 

This being said, Hartmann is optimistic about the upcoming 1/1 renewal season, unless a major cat event or a further escalation of the geopolitical situation will arise as a game-changer.

“While many people think first of all about US hurricanes as driving the market’s terms, we will have to embrace the fact that as the global risk landscape is evolving quickly, we have to be prepared for the unexpected to happen. 

“However, from today’s perspective I expect this will be an orderly renewal for both clients and reinsurers,” he concluded.

Johannes Martin Hartmann is the chief executive officer of VIG Re. He can be contacted at: info@vig-re.com  

For more news from the Rendez-Vous de Septembre (RVS) Click here.

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