Amid calls from brokers for reinsurers to provide lower-attaching property cat coverage and resistance to attempts to further cut ceding commissions on US casualty quota shares, Scor’s Jean-Paul Conoscente has said the industry must first address under-pricing at the primary level.
Reinsurance intermediaries in Monte Carlo called on reinsurers to walk back some of the improvements they achieved last year in what was described as a generational hard market for cat, most notably the significantly higher retentions.
Those higher retentions have meant that the bulk of claims from the last two years of heavy losses from secondary perils such as severe convective storms have fallen on insurers.
The argument has been that reinsurers risk losing relevance if the coverage they provide continues to attach above the attritional small to mid-sized cat events that have been the driver of insured losses recently.
In an interview with The Insurer, Conoscente, who is CEO of Scor P&C, acknowledged there will be a lot of pressure from brokers and clients to lower retentions, as well as to try and secure retention protection covers.
“I think the issue is really the adequate pricing of those risks, and because they’re not adequately priced, it is creating the issue for the insurers that have a bigger retention. They want to pass on the problem to somebody else.
“But I think that what we need to do as an industry is to fix the problem and charge the adequate price for the product,” said the executive.
He said that Scor would put up “a lot of resistance” to lowering retentions or supporting retention protections, or would seek pricing that insurers would likely view as uneconomical.
“It’s at the front end, that’s the problem … the insurance companies are not charging enough – it’s not hurricane, but it’s tornado, flood and hail,” said Conoscente.
The issue of small to medium-sized cat activity is not specific to the US, he added, citing Canadian losses this year including the Calgary storm, Quebec and Toronto floods, and wildfires in British Columbia.
“I think it goes back property insurance being based off the last 10 or 20 years of performance and it doesn’t really include the anticipation of some of this rise in smaller climactic losses … in the US it is very driven by recent events but there isn’t a systematic drive to push up rates for tornado hail,” he continued.
The rise in frequency of smaller cat losses across swathes of the US has also brought into question the benefits of writing a geographically diversified book of cat business across the country.
“This is what we saw in reinsurance where if you don’t have the right price for the frequency covers your diversification becomes ‘worsification’, and you get hit everywhere at the same time.
“That’s why, until the prices are adequate at the insurance level, as reinsurers we’re positioning above a trend level of frequency. To me it’s more for the insurers to fix the issue with their own portfolio, and then once they fix the issue, then we can talk about reinsurance,” Conoscente added.
Still bearish on casualty
Arguably the biggest focus at this year’s Monte Carlo Rendez-Vous was again US casualty, with Conoscente noting that Scor has been bearish on the space for a few years and the rest of the market is now “catching up”.
“The more recent years are not really developing as expected. Last quarter a few insurers finally admitted that the price improvements are probably not keeping up with the loss trend for the more recent years,” he said, adding that he agrees with this view.
“There are two aspects: there’s capacity, and then there’s prices. I think capacity has been shrinking,” the executive continued.
He noted that as some of the more “traditional” players have pulled back in recent years – including Scor – others have come in looking to grow in the market, including several Bermudian carriers.
“I think even those markets are starting to pull back,” Conoscente observed.
The executive said he doesn’t subscribe to the view that the shortening of limits by insurers in the hard market that began in 2019 has been a driver of accelerating the settlement of claims, as he instead attributed rising loss costs to litigation finance.
“The returns they’ve actually realized and are promising their investors are 20 percent plus, and they have a track record to show that,” said the Scor P&C CEO.
Conoscente also commented on the likelihood of further success for reinsurers in pushing cede commissions further down.
The argument against a more aggressive stance by reinsurers on this front has been that historically insurers have just made the decision to retain more business net, rather than give up economics on casualty quota share deals.
“I don’t think that’s the case anymore. That’s how the brokers justified the 30 percent plus commissions by saying if we reduce it to 22 percent insurance companies will no longer cede.
“But I think the fear factor is widespread. I don’t think companies will stop ceding if ceding commissions get back to a reasonable level,” he suggested.
Instead the onus will be pushed back onto insurers to take steps on the underlying business to improve profitability.
“That forces them to address again the under-pricing of the product. Casualty takes time … the bleeding is more gradual but I think this renewal will be a critical one to address that issue,” Conoscente continued.
Time for change?
He said that while the industry focus in recent years has been on nuclear verdicts, the inflation of smaller claims is also driving loss cost trends.
And he highlighted the challenges in commercial auto as being indicative of broader problems in the US casualty market.
“[In commercial auto in the US] the rate has increased to such a level that underwriters think the product is profitable, but it still isn’t because the loss trend is actually increasing faster,” said the executive.
Asked whether reinsurers have been enablers of the problem by allowing cedants a significant economic benefit from the override on quota shares, Conoscente agreed, highlighting the margin that has allowed insurers.
“You could try to take a drastic decision to completely exit all the programs, but I think what reinsurers tend to do is adjust the shares downwards to adapt to what they see,” he observed.
He drew parallels to the eventual generational hardening last year of the property cat reinsurance market.
“Suddenly there was a lack of capacity, and then insurers had to pay a dramatically different price and different structure to attract the capacity. In casualty we’re not there yet and I don’t know if 2025 will be that renewal, but I think it’s gradually getting worse and worse.
“Last year we had two camps. You had the Europeans that were really bearish and the Bermudians that were really bullish. I think this year everybody’s in the bearish camp. How bearish are they? We’ll have to see,” he concluded.
