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Recent catastrophes reveal cracks in reinsurance

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Source: Asia Insurance Review | Nov 2017

Asia Reinsurance

Hurricanes Harvey, Irma and Maria and the earthquake in Mexico have shown that the narrowing profit margins of non-CAT reinsurance lines are not sustainable. Mr Rene Lamer, Chief Executive, Singapore Branch of Sompo International, elaborates.
By Ahmad Zaki
Just prior to the Monte Carlo Rendezvous , the international reinsurance market had surplus capacity in most lines of business and was entering the January renewal negotiations with a confident attitude. 
   However, Mr Rene Lamer pointed out that even with this surplus, some longer tail lines were beginning to show strain, with companies re-underwriting or withdrawing entirely from them. “Certain lines of business were also tightening up, not because of lack of capitalisation, but because margins have become so thin, they are no longer sustainable,” he said.
   Just a few weeks later however, four hurricanes, the California wildfires and the earthquakes in Mexico, are causing tremendous uncertainty over the magnitude of the losses for the industry and what the impact will be for the global market. 
   According to Mr Lamer, the losses accrued by these catastrophic events are likely to expose inadequate returns across the majority of non-CAT reinsurance lines. “Over the last few years, the market has experienced deteriorating rate environments across all lines of businesses. When you have a year with limited CAT losses, the profits from the CAT business strengthen the earnings, but when you have a year with heavy CAT losses, it draws attention to the non-CAT lines which may not be performing well.” 
   “Another factor is the increase in cost of retrocession after these events and its subsequent knock-on effects, which will have a significant impact on the market, particularly for underperformers. The retro market has always been a really good harbinger of a changing market.”
Exposing the weaknesses
He said the reinsurance business lines other than CAT that are showing a poor level of rate adequacy can be divided into two broad groups – general non-CAT short-tail lines and longer tail lines. 
   “Non-CAT short-tail lines, such as Property Risk, XL and Proportional, obviously have very thin margins, while longer tail lines wrestle with a weak interest rate environment and increased competition and price inadequacy can be less obvious. 
   It’s not just CAT reinsurance pricing that has declined, it is across the board. We are really beginning to see that the overall price adequacy is lacking.”
The impact of changing global weather patterns
As the devastation from the recent catastrophes have continued to accumulate losses, it is hard to ignore the impact of global weather trends and the effect it has on the industry and also on agriculture. 
   Sompo International has a strong presence in global weather and agriculture in both the insurance and reinsurance space, he said. “It is an area of growth for us because demand will be commensurate with increasing awareness of the uncertainties around global weather.”
   For Sompo International, this growth will be captured by Sompo Global Weather, a market-leading team which writes tailored weather-driven risk management products indexed to weather variables. They have leveraged innovation and technology to provide a variety of parametric solutions to companies globally across a range of industries that are exposed to fluctuations in weather. They have also developed proprietary technology which enables individual companies or farmers to access real-time pricing via its online platform. 
   To continue their technological advancement, Sompo also recently announced a Global Clearing System, a worldwide platform that aims to set a new global standard for conducting business and provides customers with a wider array of products across various insurance markets. 
   “For us it is really important as we continue restructuring and further expanding Sompo International’s global footprint and product offerings. This web enabled platform will provide all Sompo Group operations with access to view and clear submissions regardless of their location, operating platform or legacy system, enabling us to coordinate the transactions that we’re undertaking across our locations.”
Uncertain economic outlook is a concern
“From the macro level, economic risk is something we should not forget about, as we’re not out of the woods yet. I think the global economic outlook, while not absolutely terrible, has a long way to go before it will pick up,” he said.
   The uncertainty has a lot of knock-on effects, with past patterns predicting future increases in frequency of large risk losses. “That tends to be a direct result of pricing and underwriting standards coming under pressure. Risk mitigation tends to deteriorate as cost becomes an issue. And direct markets as well as reinsurers need to be aware of this. Deteriorating pricing coupled with an increase in frequency can create issues in the overall health of the market. For me, economic risk is essentially something we all need to keep top of mind.”
   A further concern for Mr Lamer is the underwriting discipline, or lack thereof, in the market. “Particularly after the events of the last few weeks, we need solid underwriting discipline on the direct side as well as the reinsurance side, to recognise when pricing needs to change.”
   “The market is going to be what the market is going to be. It’s difficult for any one company to change the market. At Sompo, we are well-positioned for current and future markets. We will continue to focus as we have always done on disciplined underwriting, building strong distribution channels, and providing our clients with capacity and product diversification.”
   But the reinsurance industry has been through tough times before, he said. “The wonderful thing about reinsurance is that it’s been around for a really long time, it is a tried and tested product, it really does work well. But I think we are in particularly trying times and the stronger companies with the best people, products, distribution and vision will prevail.” A 
Providing real value
Mr Rene Lamer of Sompo International gives his thoughts on cyber, regulations and the future. 
On cyber
“Cyber is a difficult risk to assess, it is difficult to know what the true risk exposure of cyber is. There is certainly a need to better define what constitutes cyber risk in policies than how it is done right now. 
   As an example, there is a meaningful difference between covering systemic risk and malicious damage and the policies need to address this. As policy wordings become clearer, it will become easier to quantify the risk.
On regulations
Generally speaking, regulators are doing what is best for their regions and their markets; to build and develop the industry; and good regulation is absolutely essential for a healthy marketplace. 
   However, what I would like to see is a continued increase in cooperation between regulatory bodies globally. A system of strengthening regulations in our industry will at the same time reduce the duplication of administrative work that each region has to bear. This, I think, will be a real win-win for all parties.
   Through the Sompo Group, there is a lot of interaction with government bodies to provide affordable coverage solutions throughout Asia. We participate in many programmes, stretching from the Pacific Islands to SEA, from farm products and weather products to general property, and many of these are World Bank or government-sponsored 
On the future
Our priority is growing with our partners across Asia and finding where we can provide real value. Simply providing capacity each year, with market-derived pricing, is not enough to add value. Whether it be pricing, structuring and/or tailoring a variety of different products across various lines of business for each of our clients, that provides value. To me, that is what forges long-term partnerships.
   The other area is expanding our products such as agriculture and global weather. Demand for agriculture coverage in Asia is growing and will continue to grow for quite a while. Having expertise and very strong teams in these areas, we are well poised to provide products to meet that need.”
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