With the 1 January reinsurance renewals behind us and the mid-year negotiations well underway, it’s clear that primary insurers increasingly recognise the valuable role that reinsurance plays.
Primary insurers rely more on reinsurance support in uncertain times and right now they have a lot to think about.
Opinions on the economic outlook are mixed but it seems like the exposure base is growing, pushing up premium levels.
It’s a positive trend factor for the market, though the counterpoint could be an uptick in claims frequency; rising inflation could exacerbate the loss situation further.
Insurers’ minds are already focused on shock losses, with the run of cats in 2017 still fresh in their minds.
After a long, relatively benign period, the terrible trio of Hurricanes Harvey, Irma and Maria (HIM) reminded everyone that big events still happen and can be outside expectations.
I believe HIM has certainly stabilised the trend for insurers to buy less property cat reinsurance coverage; for some it will be a wake-up call to buy more cover.
The conditions are right to buy more because reinsurance is still really good value.
Buyers have seen how effectively reinsurers managed their own capital and made use of third-party capital. Reinsurers’ balance sheets have never been stronger and counterparty risk is as low as it’s ever been.
The traditional market functioned as it should, as did the insurance-linked securities (ILS) market, proving that alternative capital really is here to stay.
The losses of 2017 actually helped cement the investment thesis for a lot of ILS managers and their clients.
The coverage gap
But Hurricane Harvey also revealed that a big protection gap can still exist in a market that has high insurance penetration.
When people talk about the coverage gap it is often in the context of emerging economies and not so much in a market like the US, where insurance penetration is so high.
Yet it’s estimated that around three-quarters of the Harvey flood damage was uninsured, despite the availability rel="noopener noreferrer" of the National Flood Insurance Program (NFIP).
Flood is a great example of how a bureaucratic paradigm doesn’t address the needs of insureds. There is a place for the NFIP but not at the expense of making sure people are covered.
One government-backed scheme that has worked out well for insureds and insurers alike is the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA), which runs to 2020.
TRIPRA and its predecessors were important in the early days after 9/11, helping the private terrorism market take root and grow, on both the primary and reinsurance side.
The availability of high-quality capacity sometimes spurs demand for coverage and
I think we are seeing that happen with TRIPRA.
Today there is more than adequate terrorism risk insurance capacity in the private market – except for the most extreme catastrophic events.
So my view of the market here in the US is that a strong, well-resourced reinsurance sector stands ready to help primary carriers take advantage of growth, whether it’s in their core property lines or specialty risk classes such as terrorism and cyber.
Please contact Ed Hochberg on +1 215 309 4520 or firstname.lastname@example.org