Reinsurance Tutorials #1 - Season 3
Hi everybody 👋
Today, and for the first Reinsurance Tutorials video of the season, we will talk about "When climate change pushes up prices"
This subject will be addressed by CCR Re experts Georges Guzman and Emmanuelle Huguet.
Let’s start! ⏬
[Georges Guzman] : Hello, I am Georges Guzman, I am a CAT modeler at CCR Re.
[Emmanuelle Huguet] : Hello, I am Emmanuelle Huguet, and I am an Advisory Actuary at CCR Re.
[Georges] : We are here to talk about climate change, and its impact on prices.
[Emmanuelle] : “When climate change pushes prices”, let’s start!
[Georges] : First, let’s ask a question : Why does the January 1st 2023 renewal mark the spirits and particularly in CAT?
CAT reinsurance, which represents the bulk of Non-Life reinsurance expenditure, was the most challenging segment of the market at the January 1st renewal.
We have witnessed a radical shift in reinsurance records, with the largest rate increase and most significant changes in program structures for 30 years, in almost every country.
[Emmanuelle] : So it is legitimate to ask questions. What was the reinsurance’s industry’s position on this renewal, and why?
After six years of disappointing returns and above-average catastrophe losses, the reinsurance market took steps to recover by redefining the scope of CAT treaties, with narrower coverage definitions and more excluded perils.
In addition, retrocession renewal also suffered from the same tightening of conditions in CAT, with higher prices and a limitation to the most important modelled territories and perils. Hurricane Ian also disrupted retro supply, with markets pausing to consider business plans, and significant ILS capital potentially committed to guaranteed retro deals. The late renewal of retrocessions added additional delays and uncertainty to reinsurance renewals.
The reason for this is not only the drift in claims which would explain such tough market conditions?
[Georges] : January 1st 2023 renewal made us deal with a combination of events, not only related to claims but also about geopolitical issues caused by the war in Ukraine and macro-economy.
The market has faced extreme volatility regarding inflation which has reached 30-year highs, raising concerns about compensation and reserve levels, particularly in real estate sector due to rising construction costs and auto parts prices.
Climate change is leading to a shift in investor vision: major claims are reaching high levels. The most significant event of the period, Hurricane Ian in late September, only strengthened the determination of reinsurers to accelerate the necessary changes in the market.
At the same time, losses due to secondary risks, such as forest fires, tornadoes, floods and hail, have contributed significantly to the deterioration in reinsurers' revenues.
In this environment, it is much more difficult to raise capital in the reinsurance market.
[Emmanuelle] : How have insurers managed the hardening of renewal, and particularly in CAT?
Overall, insurers were able to place desired limits in programs on January 1, but with little to no excess capacity. They had to adapt to market conditions by increasing retention and readjusting their program limits, which reduced the pressure on capacity at renewal.
The winners are the knowledgeable insurers that started renewals early and took a pragmatic approach, exploring a wide range of options and program structures, as well as a wider range of capacity providers.
As for reinsurers, those that have made their position known early in the renewal process, offering collaborative and workable solutions while maintaining their capacity commitments are best positioned to take advantage of future growth opportunities.
[Georges] : Basically, the impact of climate change is sometimes more difficult to capture and to include in pricing because there are a multitude of dimensions between tangible changes by 2050 and the price of a renewed treaty the following year.
However, some events, such as the July 2021 floods in Germany, clearly bear the mark of climate change. The occurrence of such intense events will remain occasional in the short term, but must be adequately incorporated into pricing.
Beyond the occurrence of these events, we must also question the return periods of certain historical events for which the market expected larger values than the observation of the short-term history: the year 2022 has shown us, for example for hail in France, that shorter return periods on extreme events should already be consistent with the effects of the CC.
[Emmanuelle] : Thanks a lot for watching this video, hope you enjoyed it.
[Georges] : Hope you get everything straight about how climate changes impact the prices.
[Emmanuelle] : Good-bye!
[Georges] : Thanks good-bye!
Bye for now 👋
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