Munich Re’s Winter: Property reinsurance in the balance…

Marcus Winter, president and CEO of Munich Re US, on a property reinsurance market that looks to have found an equilibrium, while rate and reserving adequacy for the most recent US casualty treaty underwriting years is open to question…

How would you characterize demand and supply in the property cat reinsurance market?

Property demand is still growing. We’ve seen a lot of additional limits being bought in the US in the first half of 2024 and we know that the demand growth will continue. Some of that is just a reflection of inflation, of underlying values, economic growth and exposure growth.

You have some uncertainties around climate change and modeling of events, and you also have a bit of pent-up demand. Now [buyers] are catching up and aligning their purchase with their modeling and capital requirements again. That’s why demand remains strong.

There’s also a bit of additional supply, mainly from the traditional players, and that’s why the property market will remain healthy.

There’s a lot of discussion on the property side about the cat bond market. It looks as if capacity has shifted from the sidecar segment to the cat bond segment, and there’s a big difference between the two. When you have a cat bond, you put out [say] $100mn [into a] cat bond and that’s it.

But if you put $100mn into a sidecar that does reinsurance, that can support much more than $100mn in limit. It’s the same capital, but the leverage for that capital in a sidecar structure is much bigger. So if [capacity into] cat bonds goes up, that does not necessarily mean more limit can be supported because at the same time [capacity from] sidecars goes down.

The traditional capacity carriers have had good years and that’s why they will keep deploying the capacity. Will rates go up by more than inflation or less? That depends on the weather in the next six weeks. Even without a hurricane, typhoon or cyclone, [the market] will stay at the current level, with no surprises.

Would you consider allowing buyers to lower retentions a little, or offering buydown layers?

I don't know what the others will do, but we would not. The modeling uncertainty is too high in those ranges. The perils that affect those layers – like hail, frost and snow – are not very well modeled. They are better than they used to be but it’s not the same quality we have for wildfire or hurricanes.

When you look at the loss experience of the insurance companies, they don’t buy the lower layers for volatility management, they buy it more for earnings protection, and reinsurance is not a good tool for that.

What does the changing nature of severe convective storms (SCS) mean for portfolio diversification?

You move from a situation where you have spikes in losses that you can reinsure because that is volatility, to a situation where you have an expected [loss] every year and reinsurance is not the right tool for the losses.

That pattern has changed and the diversification benefit of having a countrywide portfolio has gone. The main driver of that has been SCS.

Moving on to US casualty – are you bullish or bearish on the trajectory of the market?

I would say there are two different philosophies in the casualty market. There are those that say the last three years were very good years after very poor years up until 2019. We have always been more cautious and we are in the second camp.

We’ve always said that the latest years are just too green to really know, and from what we see at the moment, those years are challenged by the underlying trends – social inflation, legal system abuse, however you want to call it.

That’s why our strategy was to not grow into those years and rather reduce in certain areas, and that has worked very well.

We have a casualty portfolio of a certain size but it is not dominating our book. It’s with cedants in parts of the market that are well understood. It’s a solid casualty portfolio and we have no issues on the reserving side.

We will just wait it out and we will need to see the reserving actions in the market, both insurance and reinsurance, in Q3 and Q4. In all likelihood we will just move with our prices up a bit, or ceding commissions down a bit.

But if there’s material change in the casualty market in the current environment, we will not deploy more capacity on the casualty side. We don’t need to cut back drastically because we did our own work in the previous years.

How do you pick the insurers you want to support in US casualty?

The flight to quality in all directions along the value chain is getting more and more important. The good insureds want to have solid insurers, and the good insurers want to have solid reinsurers.

Our rating increase to AA with S&P certainly helps in those discussions because it’s another external testament of the solidity of the balance sheet.

On the property side, we always say that the important discussion is not whether you pay seven on line or seven and a half on line. The important discussion is who gives you capacity after the next event.

And on the casualty side, the question is not whether I pay 2 percent more or less on cede commission; the question is who will be around in 15 years to pay my claims.

The longevity we have as a company and the rating that supports that across all the different rating agencies, and the economic results we show because of our cautious approach in some of those difficult areas helps us to remain a very important trading partner for virtually all of our cedants.