Swiss Re expects ‘drastic’ price adjustment in January renewals: CFO Dacey

Global reinsurance giant Swiss Re is anticipating a “drastic” price adjustment in the January 1 renewal season, according to comments from its chief financial officer (CFO) John Dacey this morning.

Speaking on an earnings call following the announcement of Swiss Re’s results today, Chief Financial Officer Dacey explained how the reinsurer is looking at market supply and demand dynamics and what its customers can expect it during the all-important January 2023 renewal season.

Regarding market forces, Dacey explained that “we are seeing a dislocation in the reinsurance market in general and natural disasters in particular. It is clear that, among other things, inflation has increased the value of assets around the world, increased the level of protection required by these asset owners from major corporations, and increased the amount of exposures that the main companies would like to reinsure.

For Swiss Re itself, that doesn’t necessarily mean the company will increase its own exposure, Dacey said, despite the opportunity presented.

But, “What we will be is an engaged participant in this space as we move forward,” he said.

Continuing, “We will work with clients who are willing to recognize underlying risks and appropriate pricing.

“But I would expect a significant increase in that price and I would expect a significant increase in risk retention by primary companies as we move forward.”

Going on to say, “I think it is clear to all that we would not just wait but demand better expected returns on the business we write and therefore discussions with our clients reflect in some respects this reality, but some people are likely to leave unhappy with the amount of price increase we think is appropriate at this time.

“So we’ll see where the January 1 renewals go, but it’s going to be a challenge, generally speaking, and in particular when it comes to anything affecting the Florida market.”

Later, again during the January 2023 reinsurance renewals, Dacey said it was important to consider the backdrop.

“Which includes not only the fatigue, but also the frustration of third-party capital in the ILS market. Which includes a capacity reduction announced before Ian by a number of reinsurance participants in the nat cat space. And reflects an increase in broader asset values ​​and an increase in demand from major companies for coverage.

“Which means we have an imbalance, a classic supply-demand imbalance on January 1st and I expect prices to not show some sort of evolutionary adjustment, but rather an adjustment quite drastic to reflect the risk that is transferred onto these tail events,” he explained.

Finishing by adding: “We believe we have a good idea of ​​what an appropriate price is and we are in discussions with customers to ensure that they understand our models of anticipation of increased loss costs, but also the margins that we expect to be above that as we enter 2023.”

Earning margins, or a positive return on capital deployed, is becoming critical in natural catastrophe reinsurance, especially after years of failure by many players.

As we have often said, underwriters must cover their loss costs, their cost of capital, their expenses and a margin for their capital providers, over the cycle and over the long term.

This need has become more urgent given the recent historical performance of nat cat underwriting. The price increases necessary to guarantee positive returns to capital providers will therefore be significant.

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Eleanor C. William