Cat risk still “value creating”, but price rises needed & expected: Swiss Re CFO

Catastrophe reinsurance underwriting business is still “value creating” for global reinsurer Swiss Re, but the company has been sending “strong signals” to the market through its pricing of late, according to CFO John Dacey.

Speaking after Swiss Re’s latest results announcement at the end of October, the firm’s Chief Financial Officer John Dacey commented on catastrophe risks, saying that more rate is required.

“This is a competitive marketplace. We’ve demonstrated with our underwriting strategy, that we moved away from some of the lower layers of risk and protected the group’s earnings, but we also sent some very strong signals to the market about where pricing was appropriate, or not,” Dacey explained

He went on to say that, “In the lower layers we believe there will be a move in pricing towards our own models and our own views on pricing.

“We’ll see the degree to which the market gets there. But we see lots of good reasons, from the increased frequency and severity of weather events, the secondary perils, that will require an improvement in pricing for reinsurers and ultimately mean primary insurers need to charge more.”

As a result of this, Dacey said that looking ahead to the upcoming renewal contract signings, “We’re cautiously optimistic for positive rate improvements for the industry broadly and for Swiss Re as we go into the January 2022 renewals.”

Dacey further explained that, when it comes to underwriting catastrophe reinsurance, the market continues to add value for Swiss Re.

“We’ve been pretty clear in saying the cat market is not homogeneous, there are parts of this that are correctly priced and we’re pleased to participate in, but this tends to be in the upper layers.

“We’ve also been vocal in saying that in 2020 and the beginning of 2021, that lower layers in some geographies seem to be under-priced, particularly aggregate covers.

“We’ve removed ourselves from approximately $2 billion of notional exposure coming into 2021, to reduce that exposure because we didn’t feel it was adequately priced at the time,” he explained.

Swiss Re underwrites its catastrophe reinsurance business with a loss ratio in mind, to ensure it can make a profit from it still.

That and the movements away from areas of the risk tower where it feels catastrophe risks are still underpriced has helped the company to deliver on this in the year to-date.

As Dacey said that Swiss Re’s natural catastrophe portfolio is still operating with a combined ratio below 90 for the year to September 30th.

“At that level we think this is value creating for us and we’re happy to write this business and engage with clients on increasing some positions if the pricing is adequate,” Dacey said.

One area that could be more challenging is retrocession, which unsurprisingly has been particularly impacted by the major catastrophe losses of 2021.

While that could be a challenge for some reinsurers, especially those that rely heavily on retrocession from third-parties, Dacey is not concerned for Swiss Re.

“We see some challenges in the retro market with capacity being trapped and not a whole lot of new money coming in.

“So, firms like Swiss Re that have their own capital are well-positioned,” he explained.

Of course, Swiss Re has access to third-party capital, which it uses alongside its own balance-sheet capital in catastrophe risk underwriting, through its Sector Re sidecar and its more recently launched insurance-linked securities (ILS) funds.

That may prove a valuable lever again in the 2022 renewals for the company, as it looks to navigate layers of the catastrophe risk tower that it deems price adequate for its own balance-sheet capital.

Also read:

– Sidecar investors likely relieved on Swiss Re’s Ida loss pick: CFO Dacey.

– Swiss Re’s catastrophe book positive despite ~$2.5bn large loss burden.