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Hurricane Ian tips balance, to severe dislocation & limited retro: Lancashire CUO Gregory

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Hurricane Ian’s impacts in Florida and resulting costs flowing to the insurance and reinsurance industry has tipped the balance from a hardening market into a hard one, according to Lancashire Group CUO Paul Gregory.

paul-gregory-cuo-lancashireGregory was speaking during the Lancashire nine-month call with analysts this afternoon and discussed market conditions and how Lancashire is positioning itself to capitalise on them.

He said that the outlook for the renewals of natural catastrophe exposed lines is “very optimistic” for 2023.

“We’ve seen quarter-on-quarter hardening in the catastrophe reinsurance classes through 2022.

“Pre-wind season our view was that this would continue even without any significant activity, given the shift in demand-supply dynamic, with inflation really pushing client demand for more limits in a market where supply appears to be retracting.

“Hurricane Ian has tipped the balance from a hardening market, to a hard market and we anticipate severe dislocation for 2023 renewals,” Gregory explained.

Moving on to speak about retrocession and how the market dynamic is playing out in that area of the risk transfer chain, Gregory noted it will be particularly challenging.

On the state of the market and Lancashire’s planning for its own retro needs, he said, “It’s incredibly early and there isn’t a huge line of sight as to what exactly is going to happen in the retro market at 1/1.

“We probably have five different plans as we sit here today, just depending on how the market plays out.

“The retro market, I can’t see their being materially more supply, I think that’s reasonably obvious and we’re all pretty clear that pricing is only going one way and there’ll be pressure on peoples retention levels, etc.”

But he remains bullish that Lancashire will be able to secure what retrocession it needs, given the firm’s long relationships in that space.

“We will not be immune from what’s happening in the retro market, but I think we sit near the top of the queue,” Gregory explained.

Continuing to say that, “A lot of our capacity, as you know, is predominantly with rated carriers. We have very little protection from ILS funds, which I think helps. But the job we will do over the coming weeks will be to analyse what retro capacity is available and the we move between what we do on the inwards and what we buy on the outwards.”

Either way, he said the margins on the property cat book Lancashire is writing are up significantly and that the company will optimise according to its inwards book, versus needs for outwards retro and what the market will support.

He also acknowledged that Lancashire will continue to write some retro itself, although the size of this opportunity will depend on market conditions.

Asked about whether hurricane Ian will have any impact to the firm’s Lancashire Capital Management Limited unit, the third-party capital collateralised retro reinsurance underwriting arm, Natalie Kershaw, Group CFO, explained that some impact is to be expected.

“There will be an impact in LCM from the Ian loss and you will see that impact coming through the other income line and the profit on associates line in the income statement at year-end,” Kershaw explained.

She went on to say that if you wanted to forecast roughly what this could be, you could go back and look at the year-end of 2017.

Given the multi-class, specialised retro product that includes catastrophe risks underwritten by Lancashire Capital Management, it was always likely to feel some impacts from a hurricane of the severity of Ian.

Also read: Hurricane Ian loss “within expectations” at $160m-$190m: Lancashire CEO.

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