The importance of maintaining discipline and momentum in the reinsurance market

2023 marked a significant shift for the reinsurance market. After several years of above average loss experience and below average returns, reinsurers took the required actions to reposition themselves as resilient industry leaders, adapting strategies for long-term sustainability and returning to their core role of providing capital protection.

Beyond One-Time Measures

Many of the external factors that precipitated the reinsurance market shift in 2023 have not disappeared or reversed. While reinsurers are in a strong position to deal with these trends and have shown themselves to be adept at adjusting to a changing risk landscape, it is important to remain focused and disciplined.

Climate Trends

Climate change remains at the forefront of today’s evolving risk landscape and the industry needs to continue to advance its capability to analyse this risk. We need to stay focused on exposure management and rigorous portfolio stress-testing, while adequately reflecting climate and volatility trends in pricing and terms and conditions. Several of the events this year reminded us to expect the unexpected, with the extreme weather events in New Zealand, the Hawaii wildfires and storm Hilary being just a few examples.

Geopolitical Uncertainty

The heightened geopolitical uncertainties have also not subsided. Strikes, riots and civil commotion risk is ever present and evolving in an age of social media, as highlighted most recently by French riots. In addition, we must not just grapple with the direct consequences of geopolitical tensions but also anticipate the far-reaching implications that they may have on macroeconomic conditions. We therefore need continued discipline to assess these risks through holistic approaches, taking a forward-looking approach. What we have seen in the past is different to the challenges we face today. 

Inflation and Interest Rate Trends

While certain inflation trends at the macro level have moderated compared to a year ago, continued elevated loss trends and the evolving dynamics between inflation and interest rates remain pivotal risks that need our continued attention. The discipline that the industry has built, focused on maintaining up-to-date exposure and valuation data, as well as conducting continual pricing assumption reviews, needs to be upheld. Analysis needs to remain meticulous reflecting the significant variations in inflation trends across countries and the distinct underlying inflation drivers that impact various lines of business to varying degrees.

The current interest rate environment is of course also elevating the cost of capital, which will require sustained focus on rate momentum.

Casualty lines in focus

Against a backdrop of increasing natural catastrophe losses and the war in Ukraine, the hardening of the reinsurance market was particularly pronounced for Property CAT, political violence and war exposed treaties during the last 1/1 renewal season. While not entirely ‘new news’, the continued adverse developments on pre-pandemic years for Casualty lines, coupled with the post-pandemic resurgence of corporate nuclear verdicts and uncertainties around forward-looking views on loss trends and emerging liability risks, hold these lines sharply in focus for the upcoming renewals.

Maintaining discipline going forward 

As highlighted in these examples, we are operating in a fast-changing world with evolving risks and uncertainty. As we look forward to the upcoming renewal season, therefore, it is important that momentum and discipline are maintained, and that risk is assessed on a forward-looking basis with both insurers and reinsurers remaining focused on long-term sustainability.

LM Re’s core role is to help clients through this uncertainty. We are committed to working with our clients to find common solutions to successfully navigate the ever-changing risk landscape.