Is the market adapting to the new risk reality?

Firstly, a very Happy New Year from all of us at Emerging Risks.

Well, what a tumultuous start to the year this is proving to be, characterised by one of the most difficult renewal periods in living memory. I’m guessing there are a fair few reinsurance brokers out there who have seen nothing like the kind of rampant hardening that is taking place, especially for cat-exposed business.

And when we say hard, we mean it! According to Gallagher Re, for example, rate rises for loss-affected US property cat programmes have seen rate rises starting at 35%, and going as high as 150% in some cases.

Even when one takes into account considerable inflationary pressures, that’s a hell of a re-rating, and one which many cedants may find hard to stomach.

I guess the question on most peoples’ minds will now be: how long will this last? Is this another massive spike in a market which is demonstrating unacceptable volatility and a lack of self-discipline, or is it indicative of a wider re-rating of cat-exposed covers in certain geographies?

To which my answer would be: almost certainly, a bit of both. Once investors realise that there is some serious dollar to be made this year, capacity levels will recalibrate and that will have the effect of moderating future rate increases. Simply supply and demand economics.

And yet, and yet… it is becoming increasingly clear that climate change is causing a claims revolution. We may get the odd benign year or two from now in, but I have no doubt that the long-term picture will show a cumulative increase in both claims frequency and severity, and that this will be directly attributable to global warming.

At some point soon all of us, including risk managers, brokers, insurers, reinsurers and policymakers, need to have a grown-up discussion about just how much risk the market can realistically be expected to absorb in this brave new climate world… and just as importantly, the appropriate price for these emerging risks.

Marcus Alcock,

Editor, Emerging Risks