Active and disciplined reinsurance underwriting, rather than blindly accepting all risks placed in the market, is the way to success in the current underwriters market, according to Validus CEO Ed Noonan.
Conversely, the expansion of terms and conditions and the acceptance of “throw-in coverages”, such as cyber and terrorism, within property catastrophe reinsurance renewals is a sure-fire way to expose any weak spots in a reinsurers risk management process, something Noonan said Validus is not willing to do.
During the Validus Holdings Q2 earnings call, CEO Ed Noonan discussed the state of the reinsurance market and the tendency for reinsurers to seemingly accept more risk than they perhaps should.
The reinsurance market dynamic is being driven by continued excess supply of capacity, both from traditional reinsurance players as well as from insurance-linked securities (ILS) specialists growing third-party capital, as well as a reduction in demand from some buyers as well.
In this market environment there has been a tendency for reinsurers to accept broader or more relaxed terms and conditions at recent reinsurance renewals, as well as to accept the inclusion of coverages which are unrelated to the natural catastrophe programme, including cyber and terrorism risks.
At the recent mid-year Florida reinsurance renewals, the broadening of terms “got too far out of hand”, said Noonan. As a result some deals got repriced, as the disciplined reinsurers and ILS players refused to come down to such low pricing levels, while at the same time some programmes were completed on split terms, as some markets refused to accept inclusion of other coverages such as cyber risks.
Markets like Florida have moved from being a “price-takers market” to more of an underwriters market, said Noonan, with discipline, analytics and modelling increasingly important for those reinsurers seeking to differentiate themselves while ensuring quality risks are underwritten.
The better underwriters are now resisting the pressure to broaden coverages, Noonan said, with some like Validus pushing back on brokers and buyers to refuse to include cyber or terrorism in catastrophe renewals.
“Beyond the obvious price issues, these throw-in coverages tend to find all of the weak spots in a reinsurers risk management and they only realise when there are major events. We’re simply not willing to roll those dice,” explained Noonan on Validus’ refusal to accept every coverage included in a renewal.
Validus prides itself on avoiding large losses as a result of its discipline around terms and conditions and its refusal to accept these throw-in coverages. Noonan commented; “We view this underwriting discipline as the antidote to market subscription deals, that accept risks blindly based on everything a broker places into the market.”
Looking at certain large losses to see who suffers, perhaps unexpectedly, or takes a larger proportion of a loss than you might realise is a good way to identify underwriting discipline. Noonan equates this to “active and prudent” underwriting at Validus.
Noonan said that he feels that the reinsurance market quoting process has “broken down”, with brokers and cedents coming to market with terms they feel should be acceptable rather than canvassing the lead reinsurance firms.
In the case of cyber risks and terrorism, reinsurers cannot just accept these within catastrophe programmes, Noonan said, warning that reinsurers who do will leave themselves open to accumulation risks. Also, cyber risk is still so specialist that it belongs in the specialty market, not catastrophe, Noonan continued, especially as catastrophe treaties are not even designed to respond to these new risks.
Noonan’s warning is one that underwriters need to heed. With some programmes seeing the inclusion of cyber and terrorism within the catastrophe treaty, there are now reinsurers in the market who are exposed to these risks of accumulation.
The weak spots in reinsurers risk management processes will only show up when major events occur, but with some now adding perhaps unquantifiable exposure to their catastrophe books, in the form of cyber or terror, the chances of the impacts being much wider are increasing.