“The increased capacity had softened the market and created an imbalance between demand and supply for reinsurance,” Lot said. “Reinsurers in general, though, haven’t been able to cover their cost of capital, let alone satisfy both shareholders’ expectations and generate new capital to support clients’ needs.”
Mitchell added that terms and conditions had “dramatically deteriorated” over the past decade, with reinsurance structures covering more and more for earnings volatility rather than capital preservation.
“Contract wordings had become broader and have stretched the boundaries of what was intended by reinsurers, as was shown by the disagreements over Covid business interruption (BI) claims,” Mitchell said. “At the same time, the risk environment has become more challenging with globalisation and increased litigation. Wordings need to keep up with these developments.”
Mitchell noted that the financial markets had hesitated to provide new capacity into cat bonds, sidecars, and other alternative capital instruments this year, which spelt disaster – and limited retrocession availability – when coupled with the rising interest rates. To Mitchell’s mind, this was what ultimately caused the tardiness and tension unique to the January 1, 2023 renewal period.
Lot said that Swiss Re’s strategy to support its clients and brokers through the fraught renewal process had been “to be predictable and consistent”. Swiss Re quoted early – generally before Thanksgiving – with meaningful lead shares that helped its clients manage their own stakeholder and board expectations well before the renewal period.
Asked whether Covid losses continued to be a key talking point at this year’s renewals – as it had been in 2020 and 2021 – Mitchell answered in the affirmative, albeit for a different reason than in previous renewal periods.
“Covid was a talking point this year, but more from the perspective of concluding the ongoing discussions about BI claims with partners,” he said. “This really boiled down to a major question on how to accumulate losses.”
Mitchell added that the pandemic had provided the reinsurance market with vital lessons on how reinsurers factored in previously unthinkable scenarios in order to make the world more resilient. It also made reinsurers realise how much clarification their contract wordings needed so that all parties were equally clear on what reinsurance policies did and did not cover.
“Key topics included strikes, riots and civil commotion, and non-damage business interruption, specifically around critical infrastructure,” Mitchell said.
“A number of challenging themes around what and how risks are covered by reinsurance contracts [remains],” he added. “For the industry to attract enough new capital to meet significant demand growth, we need to continue to work to address systemic risk themes.”
