Mohit Pande, Managing Director and Head of Property Underwriting in the U.S. and Canada for Swiss Re, cites the three key factors that have raised the stakes for property cover.
“The risk profile for property risk has changed – and elevated,” he says. One, attritional and man-made losses are trending upward; two, the frequency of secondary perils, including wildfires, floods and hurricanes, have increased; and third, “we are still seeing these devastating hurricanes and typhoons each year. This is the fourth year where we’ve had a landfalling hurricane.”
While it’s good to see positive pricing momentum on the primary side after many years of rate decline, he adds, “it’s important that it keep pace with the loss trends that we’re seeing.”
On the reinsurance side, Pande says, “we have not seen that major market change. The rate improvements have been below expectations, and only limited to loss-affected geographies like Florida and to underperforming business. This rate environment needs to improve, because just like on the primary side, on the reinsurance side the risk per unit of exposure has increased – and the rates have come down significantly over that period.
“It’s paramount that the rate environment improves to achieve sustainable ROEs at a time when the loss trend has increased,” he adds, noting that the overall market needs to display consistent discipline in pricing, capacity deployment, and in terms and conditions.
Reinsurance terms have been pretty stable the past few years, says Pande, who adds he has seen overall demand increase over the last several years, especially for earnings volatility cover.
Pande is also one more executive to join the chorus of those who question the validity of the term “secondary perils,” considering the loss impact that tornado, hail, flood, and especially wildfire have had of late.
“More than half of the losses are coming from ‘secondary perils,’ so it’s difficult to call them that,” he says. The challenge with secondary perils, he continues, “is that understanding, assessing and pricing them is harder because they are so much more localized. If you look at the wildfires in California, depending upon where your exposures were, you could have been hit by the Camp Fires, or you got out of it unscathed.”
Uncertainty around climate change, he adds, only adds to that equation, although in his view, one begets the other. “For some of the secondary perils like wildfire, the relationship between climate change and the frequency is quite conclusive.”
Meanwhile, in terms of reinsurance pricing, Pande sees signs of rates slowly moving in the right direction. “I think we’re starting to see that movement,” he says, pointing to a culmination of different events. It’s not the capital environment, he adds, that will drive pricing increases; rather, corrective action will be spurred by continuously underperforming business.
“For the first time in many years we have seen capital actually decline slightly,” adds Pande. “The capital is there, but it needs the returns to stay there.”