Munich Re’s Winter: Flight to quality in property and casualty amid structural shift in market

There will be a flight to quality for reinsurance buyers and sellers at 1.1 across both property and casualty, with structural change in the cat market shifting the supply curve and a focus in casualty on quality of cedant rather than cutting ceding commission alone, according to Munich Re’s Marcus Winter.

Speaking to The Insurer in the lead-up to the APCIA event in Boston, the president and CEO of Munich Re North America (P&C Re) said that the fundamental changes in supply and demand dynamics that drove the “re-baselining” in property cat at the January and mid-year 2023 renewals have not altered.

“This is not the classical hard market where after a string of losses the rates go up. This is more of a structural change in the marketplace where the supply curve has just changed.

“With no obvious new capacity coming into the market, I would expect that to be the case for the next months and quarters, and maybe even longer,” he commented.

Winter highlighted the ongoing inflationary trend that needs to be factored into pricing, as well as the risk adjustment required to reflect the frequency of events “across the whole spectrum of return periods”.

Although 2023 has so far been relatively quiet in terms of insured hurricane losses, there has been activity, with even the rare occurrence of two major hurricanes developing on the same day in the Atlantic, and landfalls that have avoided the most populous spots in the US.

Winter also pointed to the rapid intensification of Hurricane Lee as it became a Category 5 storm, as well as the high sea surface temperatures seen.

“You also add the severe convective storms (SCS) in the US that have led to really high losses for the insurance market through the whole year.

“Therefore, you add inflation adjustments – and exposure changes – then that reflection of the riskiness of the business that has increased, the general trend in the market is that has to all be reflected. To what extent depends on the client portfolio,” he suggested.

The Munich Re executive acknowledged that most of the structural changes needed in treaties have been made already this year, with a shift towards more standard cat structures.

Clear signals

Asked about Munich Re’s strategy in the property cat market – particularly in the lead-up to the 1 January 2023 renewal when several reinsurers were retrenching or giving mixed signals on appetite – Winter said that clients had given “very positive feedback” on the reinsurer’s approach.

“After Monte Carlo and after Hurricane Ian, we said right away that our capacity was still available, because our business model is not geared to a one-year hurricane period. We really want to deploy capacity in a way that we can continue to deploy even more after an event, which we have demonstrated before.

“So the discussion with our cedants shifted to some extent away from the immediate 12 months outlook and more towards them valuing the fact we will be around after the next event,” he commented.

Winter said that although the reinsurer has increased its appetite in the last 12 months, he would not describe it as having “leaned in”.

“I would just say we keep providing very solid capacities to our clients and if they need more, and we find the right prices, then we expand,” he added.

This year has been highly active for SCS insured losses, which have reached record levels.

Winter said that Munich Re has invested heavily over the last five to 10 years to develop proprietary models around SCS, as well as wildfire and increasingly flood.

He was reluctant to describe the perils as “secondary” or “unmodeled”.

“It’s just non-hurricane, non-earthquake perils and we invest heavily and we share that with our clients. We still have a sizable proportional portfolio and that’s perfect sideways cover for our cedants,” Winter commented.

The reinsurer has a strong presence in the mutual sector and has been working with strained regional players to find risk transfer solutions – including different forms of structured solutions – as well as deploying its parametric capabilities for US cedants.

Casualty partnerships key

US casualty concerns have been a dominant theme of the fall conference season for insurers and reinsurers, with talk of the latter pushing hard at 1.1 and through 2024 to improve terms with a strong focus on lowering cede commissions that had marched up to the mid-30s during the soft market.

The behavior of both sides is being driven by fears over the adequacy of loss reserves, particularly for the last few years of the soft market, which ended on the underlying insurance business in 2020 when AIG and Lloyd’s dramatically shortened limits and pushed for rate increases.

Social inflation, litigation financing and emerging risks such as per- and polyfluoroalkyl substances are all playing into the assessment of the health of the casualty market.

Winter suggested there will be a flight to quality from both cedants and reinsurers at upcoming renewals.

“We see that the performance of insurance companies across lines of business where they have good operations, managing processes based on underwriting criteria, with thoughtfully structured distribution partners – they perform better than the other companies.

“We definitely try to partner with those high-quality companies. But also the insurance companies want to partner with reinsurers that deliver expertise and have demonstrated an ability and a willingness to pay claims, with longevity and stability – particularly in casualty where claims may happen in the distant future,” said the Munich Re North America CEO.

He noted that the reinsurer recently paid out a claim dated back to 1939, and had other open claims from the 1940s, and more still from the 1970s.

“For a casualty insurer who buys reinsurance, the longevity of the balance sheet you partner with is much more important than the discussion around 2 or 3 points in ceding commission,” said Winter.