How global events can affect reinsurance
- Reinsurance – insurance for insurance companies – is a global matter
- By taking a global approach, reinsurers can be more resilient to major events
- A combination of historical data, current events and plotting potential risks is needed to fully understand potential liability.
Reinsurance – insurance for insurance companies – is a global business. It’s big business, too, with global reinsurer capital in 2022 sitting at US$560 billion1.
Just as the cost of insurance is impacted by many factors, including claims history and the exposures you have, so too is reinsurance.
Events occurring globally, such as catastrophic weather events, can significantly impact the reinsurance market both as a whole and at a local level, as Sigi Dobry, Senior Underwriting Manager at Blue Ocean and Equator Re, QBE’s dedicated internal reinsurance business, explains.
“Reinsurers generally operate globally, and could, for example, have a massive loss in Europe. Suddenly, the costs for insurance in Europe go up significantly, and reinsurers could charge more to Australian companies for cover. They have a single pot of capital and if it gets affected by a loss overseas, it can impact business in Australia, as they need to protect their capital.”
Understanding what could possibly go wrong, and modelling different scenarios, is important for reinsurance. From using historical data to plot the likelihood of events occurring to being mindful of new risks that could emerge, it’s essential that reinsurance companies have a broad view and understanding of what could occur in the future.
“Risk assessment is important in all insurance and reinsurance companies, and in a heavily regulated market like reinsurance, the Australian Prudential Regulation Authority (APRA) is continually monitoring and evaluating how we assess those risks,” says Dobry.
“The world seems to be changing faster today than it seemingly did in the past, which makes it more challenging. Actuaries spend a great deal of time looking at historical data, assessing these potential risks, and quantifying not only the risk, but how much it could potentially cost and consequently how much we need to charge for it.”
Dobry highlights the current cyber challenge as a prime example of an ever-evolving risk, and points to the explosion of asbestos claims that resulted from what we previously believed to be a safe product as an example of unforeseen risks.
Global influences on reinsurance pricing
A number of factors influence reinsurance pricing; including risk adjustments, product changes and treaty exclusions.
Additionally, actual exposure growth, local and global claims activity, global reinsurance cycles, and global reinsurer capacity and appetite, also play a part – as do current events.
“The global events of today impact pricing greatly,” says Dobry.
“For example, let’s say that getting a new roof for your house in Queensland is quoted at $10,000 today. After a cyclone, it’s likely that there will not be enough building material to repair all the damaged roofs, and local companies probably won’t have enough manpower to complete all the required jobs immediately. This means that material and builders would need to be brought in from elsewhere at an increased cost. Then the local government could decide that houses need to be re-built to be stronger and more resilient to extreme weather events. After all this, the cost of a new roof in this area will likely have significantly increased from the $10,000 it would’ve cost before the cyclone.
While we’re all aware of the supply chain delays and material shortages that are being experienced globally – Dobry highlights the inflationary financial environment as another challenge for insurance and reinsurance companies.
“Inflation has a big impact on pricing, and the rate of inflation can vary between services. For example, at the time of writing, inflation is currently 7 per cent according to the Reserve Bank of Australia2, however, that value could be lower or higher for a particular service or product, such as for instance, building materials. This means that expected claims costs could be higher or lower than the official inflation rate, depending on the ‘service’ they relate to.”
The impact of global catastrophic events on reinsurance
Major global catastrophic events have a significant impact on the insurance market as a whole – and while reinsurance isn’t only limited to covering catastrophic events, it is a major component of reinsurance cover.
For example, the Canterbury Earthquakes (or Christchurch Earthquakes as they are commonly referred to) of 2011 saw an insured loss of more than NZ$31 billion3, Cyclone Debbie in 2017 caused an insured loss of more than AU$1.7 billion4, and the 2019/20 bushfires in Australia had an insured loss of approximately AU$2.3 billion5. Meanwhile, losses from the New South Wales and Queensland floods of 2022 are still accumulating, and currently stand at around AU$5.8 billion6.
The knock-on effect of catastrophic events and subsequent claims on the reinsurance market can also be significant. Back in 1992, Hurricane Andrew almost doubled the largest US hurricane loss ever experienced. The impact of this was significant – it caused many companies to go into insolvency, and roughly half of Lloyd’s of London’s syndicates were closed after 300 years of business7.
“As a consequence, the following year there wasn’t enough reinsurance capacity to place all reinsurance covers fully,” says Dobry.
“Insurance companies had to retain some of the exposure they would normally reinsure, and as a result, we saw the first real ‘hard market’, meaning there was a rise in premiums across the board and restrictions on some coverage terms.”
In 2017, the insurance market saw its largest loss period (US$160 billion), with Hurricanes Harvey, Irma and Maria the primary causes . However, reinsurer capital across the world dipped by only 3.3 per cent in 2018 , demonstrating the resilience of the reinsurance market.
Of course, reinsurance isn’t just for catastrophic events – it’s used widely by insurance companies for many risks, and helps insurers transfer risk from policyholders and diversify those risks, too.
This global approach to risk management and pricing enables the reinsurance market to smooth out those heavy loss events, and underpins the ability of insurance companies to offer policies and deliver on claims.
Find out more
To learn more from QBE experts like Sigi, visit our website for more professional development opportunities for brokers and partners: www.qbe.com/au/brokers/support/learning-development
Visit our QBE Re website for more information or to discuss your reinsurance needs.
2 RBA - Statement on Monetary Policy – May 2023
3 Insurance Council of New Zealand - https://www.icnz.org.nz/industry/canterbury-earthquakes/
4 Insurance Council of Australia, Historical Catastrophe Data – April 2023
5 Insurance Council of Australia, Historical Catastrophe Data – April 2023
6 Insurance Council of Australia, Historical Catastrophe Data – April 2023
7 Insurance Information Institute - www.iii.org/article/hurricane-andrew-fact-sheet#_ednref6
8 Swiss Re Press Release - www.swissre.com/media/press-release/nr-20211214-sigma-full-year-2021-preliminary-natcat-loss-estimates.html
9 AON Reinsurance Market Dynamics Report January 2023