Monte Carlo reflections: flatter rates shifts focus to long-term stability

As (re)insurers gathered in Monte Carlo for their annual get-together ahead of the 1/1 renewals, the overarching theme that dominated meetings was one of stability.

One senior reinsurance executive described the prevailing rates environment as “a little bit boring”. This is a good thing for both reinsurers and cedents. Rates have now risen to a level where reinsurers are at last making a comfortable profit

However within this broad trend, some nuances are emerging.

One is the question about where attachment points should sit: are insurers paying a fair amount for the risk that they cede to reinsurers?

The other is a question over the deployment of capital and whether reinsurers are now in a position to offer more capacity to the market.

Flattening rates

During the last get-together in Monte Carlo, discussions largely centred around the extent to which rates should continue to go up. This was on the back of the dramatic rate increases that were seen during the renewals at the start of 2023.

In the event, rates went up during the 1/1 renewals at the start of 2024, but far less severely than some were expecting. This year, market participants suggest that there has been a further levelling off of the market, with downward pressure on rates as reinsurers report healthy profits.

“After a very hectic renewal period in 2023, the 2024 renewal was much more orderly, and I think that the forthcoming renewals are going to be even more so. The majority of markets are at the right pricing points,” Javier San Basilio, Chief Underwriting Officer for MAPFRE RE, told (Re)in Asia on the sidelines of the rendezvous.

“After a very hectic renewal period in 2023, the 2024 renewal was much more orderly, and I think that the forthcoming renewals are going to be even more so.”

Javier San Basilio

Chief Underwriting Officer at MAPFRE RE

The price of risk

However, there may still be some complexities in the forthcoming negotiations, including discussions over where attachment points should sit.

“We are now in a market which I think both counterparties – the insurers and the reinsurers – will be comfortable with. The question now is one of rebalancing,” says Tony Gallagher, Chief Executive Officer for Asia at Guy Carpenter. “There is now a higher proportion of risk being retained, so insurers will be looking at whether they are paying too much for the non-retained risk versus the retained.”

“Is retention at the right level or is there an ability to try to provide some earnings protection?”

Tony Gallagher

Chief Executive Officer for Asia at Guy Carpenter

The market has corrected in a relatively short period of time, and so the market needs to now take time to considered whether a readjustment and a rebalancing is needed, and by how much, says Gallagher.

“Is retention at the right level or is there an ability to try to provide some earnings protection?” he added.

Speaking during a press conference at Monte Carlo on September 8, Carlos Wong-Fupuy, Senior Director for Global Reinsurance at AM Best, said: “The changes in terms and conditions, the increasing attachment points, the tightening of wordings, is as important, if not more important, than the prices themselves.

That’s why we believe that these underwriting margins are sustainable in the short to medium term. The role of reinsurance has come back to its historical position as a protector of balance sheets rather than an earnings stabiliser.”

This is in line with the comments that reinsurers themselves made during the Monte Carlo rendezvous.

Asked at a press conference whether attachment points would be relaxed, Urs Baertschi, Chief Executive for Property and Casualty at Swiss Re, said: “We would expect that the discipline in the market and balance of the risk sharing between the insurance and reinsurance industry remains largely similar to what we’ve seen over the last year-and-a-half.”

Prior to the sudden return to hard market conditions at the start of 2023, reinsurers had been struggling to make a profit for a number of years. Baertschi emphasised that it is vital for reinsurers to return to sustainable profit-making so that they can continue to support effective risk transfer.

“The reinsurance industry is a shock absorber. We’re here to help insurance companies write their books and provide diversification for the really big-ticket items. Otherwise, the insurers will have to carry a lot more capital themselves and that will be very inefficient,” said Baertschi.

He said that reinsurers have to be mindful of the uncertain risk landscape in which they now find themselves, and avoid repeating the mistakes of the past, even if their capital positions appear healthy at the moment.

“It’s really important, throughout the entire value chain, that for the risks we are taking on, there’s an appropriate rate structure and wordings that applied, which will make that value chain sustainable to the ultimate benefit of the policyholder,” said Baertschi.

Such a stance may not sit so well in some of the less developed parts of Asia.

One Asia-facing broker suggested that while some of the more developed markets (such as Europe, the United States, Australia and Japan) might appreciate this kind of stable outlook, others (including many in South-East Asia, prefer to get the risk off their books in the most cost-effective way.

Another Asian broker observed that there appears to be a growing interest from Asian reinsurers to write retrocession business. At the moment the majority of retrocession programmes are written out of Western markets. Having Asian reinsurers also involved in the segment could help enhance risk management across the region, even as the large global players display greater caution.

Capital deployment

There was also a great deal of speculation during the Monte Carlo gathering about whether (and where) reinsurers might deploy fresh capital, now that the industry has returned to profitability.

Again, though, reinsurers are unlikely to be too ambitious in their growth plans.

“When we say there’s more capital in reinsurance, I wouldn’t say there’s necessarily more capital for every risk or every region,” Scott Hawkins, Managing Director of Australasia for Munich Re, told (Re)in Asia. “If you think about the nat cat business specifically, there’s lots of players who have increased their risk appetite, but often that might be only for certain perils, or it might be only at certain return periods, not necessarily at lower layers or throughout the program.”

He says that any region that’s overly exposed or has a very bad experience over a longer period of time “will influence someone’s risk appetite as to whether they want to write there or not, particularly if there are surprise losses”.

“When we say there’s more capital in reinsurance, I wouldn’t say there’s necessarily more capital for every risk or every region.”

Scott Hawkins

Managing Director of Australasia at Munich Re

This sentiment was highlighted at a Munich Re press conference, in which member of the management Board Stefan Golling said: “I think we are very far away from a super hard market, where reinsurers can blindly accept any risk that is presented to them or where they can simply aim for growth. Those that think that will fail very quickly.”

This is not to say that reinsurers will not be prepared to unlock fresh capacity – under the right conditions.

“We are ready to deploy more capital there as required, providing that the terms and conditions are right and there is a good prospect of building stable long-term relationships,” says Basilo from MAPFRE RE. “The US cat business is looking like an attractive market. Asia Pacific is looking attractive in certain markets. APAC has been a very important growth area for us for a number of years.”

At a separate press conference, Sharon Ooi, Executive Board Member of Hannover Re, said: “We continue to see quite a lot of opportunities in the emerging and developed markets in the Asia-Pacific region. The insurance markets in Asia are highly competitive. Urbanisation, a continued increases in insurance penetration, inflation as well as climate impacts will continue to drive insurance and reinsurance demand.”

Capitalising on these emerging opportunities will almost certainly require close collaboration with cedents. Basilo speaks of building partnerships for the long term. Ooi talks about working with clients to manage the increased costs of reinsurance through treaty restructuring.

“We are quite cognizant that we will see an increase in frequency and severity of floods, hail, convective storms, wildfires, cyclones and typhoons across the [Asia Pacific] region,” said Ooi.

The need to build bridges between insurers and reinsurers, and to maintain strong risk management discipline, will be a persistent theme as we move into 2025 and beyond.

Monte Carlo has set the stage for steady growth that will lead to long-term stability, rather than heady exuberance that could create difficulties once the market softens.