Thursday, January 27, 2022

Cat Bonds/Reinsurance: Climate, Inflation Will Be Good For Premium Increases, Aggressive Bond Pricing—Goldman

Reminiscent of Enron’s chief lobbyist, John Palmisano (senior director for environmental policy and compliance) who infamously emailed from Kyoto:

If implemented [the Kyoto Protocol] will do more to promote Enron’s business than will almost any other regulatory initiative outside of restructuring of the [electricity] and natural gas industries in Europe and the United States…. The endorsement of emissions trading was another victory for us…. This agreement will be good for Enron stock!!

From Artemis, January 26:

Climate & inflation are tailwinds over the medium-term: Goldman Sachs

With capital still abundant, the reinsurance hardening seen at recent renewals is assumed to be driven by risk aversion this time around, but the very factors driving risk and pricing higher are also seen as tailwinds for the re/insurance sector longer-term, by investment banking giant Goldman Sachs.

In a recent report, Goldman Sachs analysts say that above average losses from weather and catastrophes in recent years have been the main driver of rate increases, as the traditional industry has remained well-capitalised to keep reinsurance capacity abundant enough.

As a result, the price increases in reinsurance have lagged the primary insurance market, but could catch up over recent years, the analysts believe.

“We believe the reinsurance cycle could catch up with the primary cycle through 2022 and 2023 given the concern and expectation that the experience of the past five years could be the new normal in terms of weather losses due to climate change.

“Interestingly (and uniquely for an insurance cycle), the reinsurance cycle going into 2022 and 2023 looks to be driven more by risk aversion than a lack of capital,” the Goldman Sachs analysts explained.

This aligns with our thinking that reinsurance rates must catch-up further at the mid-year renewals in 2022, especially as such a large proportion of climate-linked catastrophe losses have tended to come from the US in recent years, where those renewals are focused.

Key factors in the market right now are general inflation and climate change, the analysts said, both of which are seen as short-term headwinds.

But, “We believe both offer medium-term tailwinds, driving the insurance cycle for longer as risks are repriced,” the analysts point out....


 As always, the Artemis commentary is, at minimum, at least as interesting as the analyst's.

Already last spring we were hearing inflation concerns from primary insurers who were seeing upticks in their replacement costs with policies-in-force priced for non-inflationary times.

And by June the reinsurers were chiming in: 

"Inflation to “sharply increase” hurricane claims costs, warns Swiss Re"

Not that reinsurerers need a whole lot of reason to ask for more money from their insureds: 

Over the years we've mentioned that these big companies have a predilection toward warning about this, that and the other thing:

From "No Surprise: Chile Leads to Reinsurance Rate Increase Debate" BRK-A; BRK-B

No kidding.
A brisk breeze gets the boys in Omaha, Zurich, Munich and London (Lloyds) talking about premium increases.
Not to mention the herverzekering crowd in Amsterdam, they're tough bastards....

And yet, they somehow survive.
Here's a 2010 post "Inflation concerns top insurers' risk list-Swiss Re".

All in all though, it is a very good business to be in:
November 2021
Re/Insurance: "Climate change a threat, but also largest growth opportunity: Swiss Re"
October 2021
Cat Bonds/Reinsurance: "City of Zurich pension to double insurance-linked securities allocation"

The next time Munich Re starts moaning about climate change and how we're all going to die, or at minimum go broke, just remember reinsurance/cat bonds are a for-profit business and that some folks a couple hundred miles southwest of München, who might have access to some very sharp minds in the reinsurance/cat bond business, seem to think this is a profitable place to put some longer term money.