Hungry for more: risk appetite and capacity in the reinsurance sector

Andy Gladwin, Global Head of Marine Treaty

(This article originally appeared in The Canopius Herald in March 2018)

Our business is driven by uncertainty. We know that there will be a collision, a blow-out or a natural catastrophe but we don’t know exactly when nor how much it may cost.

In this type of environment it is paramount to have a clearly defined strategy for risk appetite and be close enough to our clients to understand theirs. It is not always possible to make a judgement on this purely by using advanced underwriting tools.

So a very considered approach to costing risks is required. Not everything can be modelled but wherever we can, we model static exposures in the cargo and specie classes. In the event of a US Cat, there will be a natural accumulation with property risks both in earthquake and hurricane exposed zones. It is important that clients are charging for this on the original business and are making informed decisions when writing in cat areas.

The 2017 hurricane season shone a brief light on this concept in the marine (re)insurance sector and beyond. It provided a stark reminder that yachts also clash with property. It has been noticeable that subsequent to the Irma and Maria losses, there has been a significant withdrawal in the direct market space for writing MGA type business for yachts and yachts in general. This should prove an indicator as to the gargantuan size of the losses this class can face when written on the wrong terms and conditions, heavily exposed in the wrong areas and at the wrong price.

This style of doing business has been popular in recent times; entities chase growth and premiums increase quickly. With the lack of any major hurricane activity in the Caribbean since 1995 the historical results have been good. The fact that markets have chosen to withdraw even with the prospect of increased rates, deductibles, and tighter conditions, suggests their strategies are unviable.

2017 saw the highly profitable “Cat bet” that underwriting entities have depended on in recent years finally lose. It was hoped that following the $100bn – $140bn of catastrophe losses, that 2017 would have a market correcting effect. This proved to be underwhelming, largely due to an exhaustive supply of capacity in the reinsurance sector. The reason for the hard markets of 1993, 2002 was due to a lack of capacity. In today’s market entities are far larger and able to absorb loss activity.

US Nat Cat aside, the main drivers of exposure in the marine treaty world are energy assets and the International Group. In recent years the marine and energy market has been stalled by the all time low oil price and poor freight rates. This has led to more uncertainty due to the lack of investment and many construction projects being put on hold. With the price of oil now on an upward trend as well as a recovery in freight rates, undoubtedly clients will be looking to cede more exposure to reinsurers.

It would seem logical then that when looking at historical losses, claims inflation becomes a particular issue for the market.

Values and the amount of activity in the E&P industry have fluctuated but are increasing again. Platforms are getting larger; they are working in deeper waters, with more sub sea assets. We now have a couple of notable assets which are full market capacity ($7bn) risks. This has an affect on reinsurers as we hold the peaks.

New types of vessels, in both the commercial and pleasure classes also pushes more exposure onto reinsurers’ balance sheets. Container vessels are larger than ever before, meaning potential accumulation increases.

Emerging risks with courts interpreting new wordings, and the kind of increased blame culture we saw with the Costa Concordia and Rena losses, highlights how countries are becoming financially more sophisticated and sometimes ignore international conventions. Political pressure emboldens a pursuit of all aspects of a loss being paid for and corrected regardless of the cost and whether it is economically viable to do so.

At Canopius, we have the benefit of being independent and are empowered to be the decision makers. With a strong, proven underwriting team we are able to provide certainty to clients in a world of uncertainty.


Posted on 7th June 2018.