Losses borne out of major natural catastrophe events in 2017 and 2018, including Cyclone Jebi in Japan last year and the record-breaking California wildfires, has limited the supply of “high-volume, cheap retrocession” according to Torsten Jeworrek, member of the board of management, Munich Re.
Speaking to Artemis on the eve of the Rendez-Vous de Septembre, he said that major losses had been difficult to digest for investors in certain retrocession sub-markets where the claims were most severe. These investors had “high expectations on rate hikes post HIM in 2017 that were not realised in 2018,” he said.
“At the same time the performance of their investments were negatively impacted by a series of ‘loss creeps’ over those years, reducing trust in this sub-market,” he added.
Dynamics in the ILS market – including trapped capital and redemptions – has led to a very dynamic secondary market for cat bonds, with increased sellers activity and increasing yields, said Jeworrek.
Looking more generally at the supply of capital in the industry he does not see “a substantial increase in offered capital due to consolidation in the (re)insurance sector as well as trapped capital in the ILS space”.
Meanwhile, there has been upward pressure on rating as “the major ILS funds needed to showcase that the reinsurance cycle still existed, and would work to their end investors’ benefit”.
Nevertheless there was uncertainty around further rate development at the 1 June ‘Florida Book’ renewals, he noted, which has had a knock-on impact on cat bond issuance.
“Due to the fact that cat bonds are multi-year instruments, any issuance in this environment would have sent a very strong signal, as rates would have been locked in for three to five years,” said Jeworrek. “Thus, it was not in the interest of cedants to issue massive volumes as in previous years locking in rates that might quickly deteriorate.”
Looking ahead to 1 January 2020, he believes the momentum of price increases and tightening conditions in certain market segments will carry on through to the next renewals. “Overall, Munich Re is observing a widespread shift towards greater discipline in the market, which is positive.
Asked if reinsurers had done enough to adapt to the ‘new normal’, he said that alternative capital had become an established asset class in the market.
“We are convinced that insurers and reinsurers will play an important role in providing coverage alongside risk expertise, despite the emergence of alternative forms of capital. Nevertheless, using capacity efficiently with the help of portfolio diversification is not only in the interest of our shareholders; it is a necessity for the whole company and all kinds of stakeholders.”
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