Property/casualty reinsurers need to be more aggressive about pricing climate change into catastrophe cover or they could face large underwriting losses on the business line.
Although several insurance executives at the Standard & Poor’s Insurance Conference heralded the reinsurance industry’s pricing “discipline” while drubbing carriers’ poor underwriting choices, they added the effects of climate change are not yet properly embedded in many reinsurance cat contracts.
“The real question I see for the cat side of the business is to what extent climate change [is properly priced] and the effects of the change of weather patterns,” said Rolf Tolle, franchise performance director for Lloyd’s. “Rates have gone up, but the question remains ‘Is it enough?’”
P/C reinsurance rates have been climbing over the past year.
Property/casualty reinsurance rates jumped 15 percent year-over-year at the June 1 renewals, according to broker Guy Carpenter. Although the price increases were mainly driven by a spike in the Florida market, they are comparable to a 10-to14 percent increase in cat cover during the Florida-light April 1 renewals.
Although the increases are significant, Tolle said that it remains to be seen if greater increases are warranted. He added that the industry will watch the 2009 Atlantic hurricane season for cues on pricing.
“[Rate changes] will be dependent on the loss activity in the near future,” Tolle added.
Reinsurers need to take a closer look at climate change’s impact on loss activity and price the cover accordingly, said John Charman, CEO of Axis Capital. “The underlying data should drive the reinsurance market, and I think [climate change] needs to be addressed.”
Pricing climate change into reinsurance rates has become a rallying cry for the industry for the past several years, although how much of an increase is warranted remains under debate. A recent report by the London-based Chartered Insurance Institute argued that global warming may be increasing catastrophe losses by 2 percent a year.
Beyond catastrophe cover and the embedded price of climate change, reinsurance executives at the conference argued that they have exhibited significant pricing discipline over the past several years.
“I think the reinsurance market has been stable and pretty disciplined and held its margin,” said Charman. “The industry as a whole has a balanced portfolio in terms of lines of business and geography.”
Participants in the discussion were not as confidant in the primary market, arguing that many P/C carriers have given up significant margin.
“There are many places today that the property companies are too aggressive in pricing,” said W. Marston Becker, CEO of Max Capital Group. “In this cycle you are seeing primary retaining more of their business, which will be reflected in loss ratios.”
Charman agreed, adding that excessive competition among property/casualty carriers is causing many companies to write new business at an underwriting loss.
“I am very concerned about the failure of the primary market to recognize the weakness of pricing,” Charman said.
