Speaking at one of the many virtual conferences that took place in early September, Dan Malloy, chief executive officer of Bermuda-based Third Point Reinsurance, offered an anecdotal view of the reinsurance market from a broker he knows.

“It isn’t a hard market until I can’t finish a placement,” he reported the broker saying.

“I have a feeling 1/1 is going to be a hard market,” the broker added, according to Malloy’s account.

Malloy, who was speaking during a virtual fireside chat that took place during the KBW Insurance Conference along with Chair Sid Sankaran, was explaining why clients and brokers are going to welcome the capacity that Third Point and Sirius International Insurance Group will bring to the market when they merge to become SiriusPoint Ltd. in next year’s first quarter.

Malloy’s broker friend was clearly not alone in his view that the reinsurance market is not yet one that could be described as “a hard market.” (Related article, “Hardening Re Market Doesn’t Look Like Mid-1980s or 2005“) Indeed, only one report CM reviewed during the run-up to quasi-Monte Carlo events used the term “hard market” at all, and executives of two large European reinsurers suggested that market tightening happening in 2020 is “too timid” (in the words of one) and is poised to harden more than the primary insurance market (in the assessment of the other).

Below, we provide excerpts of these sources—Swiss Re, Munich Re and Fitch Ratings.

Swiss Re

“After several years of claims deterioration for the reinsurance industry, the situation has gotten worse again in 2020,” said Thierry Léger, group chief underwriting officer for Swiss Re, during the reinsurer’s Sept. 8 media conference. “As a result of that, Swiss Re has decided to focus the renewals ahead on achieving underwriting technical profitability and clarity of terms and conditions.”

Thierry Léger, Swiss Re

“The low interest rate environment is here to stay for longer and might even get worse,” he said, noting that the “timid price increases we have seen have been offset by further declines in interest rates.”

He listed COVID-19 and the uncertainty around a second wave this year, along with rising natural catastrophes and social inflation, both of which have “been with us for decades,” as other contributors to the worsening situation.

“There have been increases in premiums, [but those] have been hardly enough to offset the interest rate decline of the first half of the year this year. Also, these timid increases have by far not been able to compensate for many years of premium decline before. And they have in no way been able to compensate for the increased claims load that we are observing around us.”

“As a result, we see a real need for strong price increases to get back to underwriting profits,” Léger concluded.

Moses Ojeisekhoba, Swiss Re

Moses Ojeisekhoba, Swiss Re’s chief executive officer for Reinsurance, reiterated the point. “It is our clear view that prices need to continue to increase, driven by real risks, not just phantom risks. We have seen them. We have seen that the industry was not quite performing at the level it needed in terms of returns on capital, and if you add the additional components that have come on, it just calls for the fact that rates need to continue to increase.”

Both Léger and Ojeisekhoba also spoke about opportunities for reinsurer growth arising from greater client risk awareness and growing life and non-life exposures around the globe.

Ojeisekhoba rejected a question as to whether the reinsurance market should be described as hardening or hard. “To me, this is semantics,” he said. “I think at the end of the day, the big question mark is when you look at the risk that you take on, do we have sufficient pricing to cover the exposure that’s taken on. And I think, across most lines, Thierry gave significant evidence earlier as to why we do not quite feel that pricing is at the point where it covers exposure. Until you do that, certainly from our perspective, we feel rates need to go up.”

“Whether it’s hardening or hard, the honest truth is, I don’t see that as a point of debate. The debate is whether prices cover risk because ultimately you need that in the long term to be an industry that’s sustainable.”

“If you don’t have that, you’ll end up, for an industry that customers rely on heavily, that somehow, it’s not as strong as it should be. So, we need an industry that’s sustainable, and for that to happen we need to make sure that we attach the right price to the right risk and the right exposure.”

“To me, this is semantics. Is it hard or is it hardening? I think at the end of the day, the big question mark is when you look at the risk that you take on, do we have sufficient pricing to cover the exposure that’s taken on.”

Moses Ojeisekhoba, Swiss Re

Léger agreed. “If we define soft and hard markets in the way that we say soft market [describes] the times when we do not cover our margins and hard markets as where we actually overcompensate on the profit side to compensate for those soft markets, then it will mean a hard market would be one where we more than cover our required returns. And for sure, at the point we stand today, we are not at that level. Whether you call that a hard market or not, but that’s not the level we have achieved yet.”

“I have referred to timid price increases so far, so we are very much on the reinsurance side at the beginning of a hopefully longer trend.”

“These timid increases have by far not been able to compensate for many years of premium decline before. And they have in no way been able to compensate for the increased claims load that we are observing around us.” Thierry Léger, Swiss Re
When asked how strong they believed 2021 price increases would be for various segments of the reinsurance market, Ojeisekhoba declined to give such specifics. “From my standpoint, we tend to prefer for these discussions to be had bilaterally with our clients…because not ever single client is cut the same way. Yes, we look at aggregate expectations on rates of certain lines of business and we call those out on certain lines of business. But they are different from one client and in one country and one market to another. So, rather than put out figures that have wide ranges—and yes, they may grab a headline—I think it’s far better that we stick with the main comment, which is that we expect prices to go up and we’ll have those discussions on a bilateral basis with each individual client,” he said.

Munich Re

“We see further hardening in insurance and even more so in the reinsurance market at least next year—probably the next two years or even a bit longer,” Torsten Jeworrek, member of the board of management for Munich Re, predicted during a Sept. 7 virtual media conference.

Torsten Jeworrek, Munich Re

“It will not only be a hardening in terms of price increases. It will be a hardening of the market in terms of rediscussion of terms and conditions,” he said. Explaining why the rediscussion is needed, he said: “It has nothing to do—or not only to do—with ‘corona.’ That is the usual pattern of the soft market, which we have gone through [during] the last 10 years or so, that all the terms and conditions weaken here and there. Now is the time to look at such conditions.”

“Here we are positive, and I think that [there is] very much a market consensus that this hardening will take place,” he said while presenting a slide with ranges of potential real growth rates for insurers and reinsurers in different geographic regions.

“It has nothing to do—or not only to do—with ‘corona.’ That is the usual pattern of the soft market, which we have gone through [during] the last 10 years or so, that all the terms and conditions weaken here and there. Now is the time to look at such conditions.”

Torsten Jeworrek, Munich Re

“Why do we all think, and know, that the hardening pattern will continue?” he asked, going on to answer his own question with a discussion of three key drivers: the erosion of industry prices over the last dozen years; higher loss activity from catastrophes, large manmade losses and social inflation; and significantly lower interest rate levels in most major markets.

Speaking specifically about the social inflation component of the loss driver, Jeworrek said that “loss ratios have increased significantly over the last five or six years, even ignoring cat losses—since about 2014 or so—first in the insurance industry [and] now also in reinsurance.”

“That means that sooner or later, we have to catch up with this development,” he said.

All three factors have led to market hardening, “which is, I think, undisputed at this time,” Jeworrek said. “For the next one, two years or so, I am convinced we see more hardening in reinsurance than on the primary side,” with Asia and North America being the biggest drivers.

Jeworrek later gave some sense of price movements that have already taken shape and explained why they have not been enough as he displayed a slide with the U.S. composite insurance price change index from Marsh Global Analytics and a U.S. property-catastrophe rate-on-line index from Guy Carpenter. The Marsh index depicted an uptick in price changes in underlying primary business over the last three years—”caused by social inflation that started six years ago,” Jeworrek noted. The Guy Carpenter ROL index showed a “small permanent increase in the rate of line” since losses from Hurricanes Harvey, Irma and Maria in 2017, “which is, however, not back to the levels that we have seen 10 years ago.”

Jeworrek also noted that loss creep from insufficiently modeled secondary cat perils and tightening capacity in the retro market will also drive reinsurance market price hardening next year.

Fitch Ratings

“The reinsurance market has entered into a hard market with rising risk-adjusted prices and improving terms and conditions,” analysts from Fitch Ratings wrote in the “Fitch Ratings 2021 Outlook: Global Reinsurance” report published on Sept. 10. Related article, “Fitch’s Reinsurance Outlook Remains Negative, Despite Entry into Hard Market Phase“)

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Price rises have grown in momentum through the various 2020 renewal seasons, following the start of the coronavirus pandemic. Terms and conditions are tightening. Reinsurance treaty improvements have caught up with the improvements in pricing in the primary markets that started in 2018,” the report said, adding that reinsurers put “more disciplined underwriting and policy limit management” in place “across the market” in efforts to protect their earnings from the impacts of pandemic-related claims and lower investment income.

“Even without the pandemic, the insurance and reinsurance industry needed to adjust prices due to higher natural catastrophe claims and concerns over reserve adequacy and loss severity in U.S. casualty. Fitch therefore expects the hardening market environment to continue into 2021,” the report said.

Speaking at a Global Outlook Briefing webinar, Robert Mazzuoli, director of Insurance Ratings, noted that European reinsurers Munich Re, Swiss Re, Hannover Re and SCOR had higher portfolio price movements in 2020, on average, than in the past five years. “And it is across the board—for all four reinsurers. So, no matter what the business compositions looks like, [that] also gives you an indication that we have entered into a hard market phase,” he said. Mazzuoli also showed an analysis of normalized lower combined ratios for the four reinsurers (hovering around 95) in 2020 (combined ratios excluding the impacts of reserve releases and major catastrophe losses), arguing that this is the first signal of the onset of a hardening market in 2020.

Brian Schneider, Fitch Ratings

In Bermuda, “improved reinsurance market conditions” also helped bring normalized combined ratios for the island’s reinsurers down from 92 in 2019 to 90 in 2020, said Brian Schneider, senior director. Schneider also noted that Bermuda reinsurers have “essentially exhausted their reserve redundancies following 16 full years of overall reserve releases.”

Schneider, who went on to show a slide listing 12 Bermuda companies that have been acquired since 2015, noted that Fitch doesn’t expect one phenomenon of prior hard market phases to recur in 2021—the launch of new startups to take advantage of rising reinsurance prices and better terms. Instead, “the industry could see a few additional scale-ups akin to the relaunched Starstone U.S. that is to focus on specialty/E&S business“—an area garnering more and more interest.

Focusing on Bermuda startups from the recent past—hedge fund reinsurers started between 2012 and 2018—Schneider noted they have struggled because of soft market underwriting conditions of recent years and difficulties in achieving their promised higher risk-adjusted investment returns. He identified Fidelis as the most profitable on the underwriting side and Hamilton Re as the most successful on the investment side, with its recent Pembroke acquisition at Lloyd’s opening the prospect of better underwriting results. Third Point had already started improving from repositioned underwriting and investment strategies prior to the announcement of the Sirius deal, which will bring scale benefits as well.

“Some entities in this group could be used for repositioning in the favorable market environment,” he said, noting reports that surfaced the day before the Fitch webinar indicating that Watford Re could be bought out by a group led by its underwriting partner, Arch Capital, and rumors that Harrington Re—connected with AXIS—could also be up for sale and repurposed.