The Cat Re Scene: It’s Getting Dicey

 That’s sort of how it feels in the catastrophe reinsurance business these days. We’ve recently experienced a succession of larger, more frequent and frankly, more erratic natural disasters. From hurricanes that hit harder than we’ve even witnessed, to wildfires that burn hotter than we’ve ever seen on this planet — this is all a new ball game.

So, What’s The Problem?

Now, you know, as well as I do, how cat reinsurance is taken to be the backstop. It’s the safety net that allows insurance companies — and by extension, all of us — to recover when the unthinkable occurs. But recently, the cost of that safety net has been soaring — so much so that coverage is becoming ever more difficult to find. You’re probably looking at premiums that would make your head spin, or you’re perhaps having trouble finding capacity at all.

Why Should You Care?

Seriously, whether you’re all the way in the weeds on reinsurance or a leader of a business that has to make difficult decisions, this stuff affects you. We’re talking about resilience after these disasters, yes? Lose reinsurance contracts and, well, it’s going to have an impact on everyone — property owners, global economies, and yes, even you.

The Big Question…

So, the important question million-dollar (or more, billion-dollar!) question is: are we on a Reinsurance Apocalypse? Are catastrophe coverages as we know it on the verge of collapse? That’s what we’re going to unpack here. We’ll examine what is behind this trend and, perhaps more importantly, what we can do about it. Let’s get into it.

Exploring the CAT Re scene: Spicier than ever!

So fundamentally, CAT reinsurance is about insurance for insurers in case mega-loss events occur, such as hurricanes, earthquakes, and wildfires. It’s a critical market because it enables primary insurers to continue writing policies without facing bankruptcy after a mega-event. And now, things are definitely moving in this space. Let’s see what’s up:

Positive Trends: Opportunities are Knockin’!

Data & Tech, Baby! : There’s been a massive increase in the use of data analytics and AI. That means insurers are now more better able to evaluate and anticipate risks with greater precision. Think: hyper-detailed climate models and live data feeds.

• For example, some companies are using machine learning to study satellite imagery to determine what areas might be most at risk for wildfires or floods.
• Anyway: Improved pricing, better risk selection, and fewer losses further down the road!
• Invest in advanced data capabilities and talent. Having the data is not enough, knowing how to use it is key!

ESG IS THE NAME OF THE GAME: Environmental, Social, and Governance (ESG) is becoming huge. Investors and clients want to know that you’re not just looking after the bottom line, but also looking at the impact you’re having in the world over the long term.’

• For Lyft, it could mean better deals on insurance, because reinsurers specializing in green projects and resilience are “accessing investors,” he said.
• This approach allows us to tap into the impact of access to capital, enhanced brand reputation and growing demand from socially minded consumers.
• What You Should Know: Embed ESG in to the heart of your business strategy and provide proof that you are walking the walk, not just talking the talk.

Adverse Trends: Keep Your Eyes on the Ball!

Climate Change is a Beast: C’mon, we all know climate change is making storms, droughts, and wildfires more common and more severe. This raises the risk of larger, pricier disasters.

• For example: There have been record-breaking hurricanes and wildfires recently, and that’s putting a lot of pressure on reinsurance capacity.
• Result: Higher prices, lower throughput, and more volatility.
• Originally Published: Insider Analytics Weekly #15 noun noun nounTOP ANALYSISAnalyst Recommendation: Diversify risk portfolios, implement robust risk management, and develop innovative solutions for climate-related risks.

Silly Buggers Geopolitical: The world is a little Geopolitical — The everything. This could cause less predictability and increased uncertainty.

• Eg. sanctions or trade wars can influence investment and capacity.
• Implications: Higher disruptions to supply chain, potentially higher losses and operational risks.
• Get ready: Founders must prepare resilient operations, strong risk modelling and extensive monitoring of the geopolitical landscape

Capacity Crunch: In short — there may not be enough reinsurance to go around. As catastrophes become more frequent and severe, some reinsurers are having cold feet.

• For example, smaller reinsurers might retreat from very high risk areas altogether, or impose stricter conditions on their coverage.
• Impact: This pushes prices up, and can mean that insurers have to pay more out of pocket.
• Recommendation: Work to develop strong relationships with a diverse slate of reinsurers, including capital partners, to ensure all of the proverbial holes can be filled.

Wrapping it Up

So there you have it! The CAT reinsurance industry surely a fast-paced and difficult environment. The name of the game here is to be proactive, malleable and, dare I say, slighly smart. By using tech, embracing ESG and preparing for the lousy times, you’re going to be a much better place to navigate this wild ride.

Just remember – stay sharp, stay nimble and don’t be scared to push the creative envelope. You got this!

Healthcare

Let’s say that there is a gigantic earthquake that strikes a city with a number of very large hospitals. Those hospitals have property insurance of course, but a combined wave of damage and patient surge could bankrupt them. That’s where catastrophe reinsurance comes into play. Their insurer, which is on the hook for a ton of claims, has already purchased reinsurance to help cover these big losses, so hospitals get paid quickly so they can be rebuilt and provide care for the crush of patients. That avoids ending up with a broken health-care system after the disaster.” The reason hospitals can bounce back quickly in a crisis is because of reinsurance.

Technology

Consider a large data center. Let’s say a hurricane knocks out electricity for a long time or floods the facility. Some of the physical damage would be covered under the company’s own insurance policy, but not the hundreds of millions of dollars in business interruption costs or reputational damage. But the tech company’s insurer would have purchased catastrophe reinsurance. This would assist the carrier in covering the cost of disruption and recovery associated with bringing their services offline. This coverage serves to protect them and their policyholders.

Automotive Manufacturing

A massive hail storm destroys a car production plant. We’re talking about thousands of damaged vehicles, the plant itself takes significant damage. The primary insurance is going to help fund the repair cost of the physical damage to the factory but it’s also going to help cover the (cost of) the cars that were damaged. It is on cat reinsurance that those primary insurance companies depend to bear such massive losses given they wouldn’t be able to pay all of these claims on their own. The automaker is paid, the factory gets rebuilt and the supply chain isn’t totally destroyed. That’s where reinsurance comes in.

Manufacturing (General)

Imagine an enormous wildfire destroying an entire area where there are several manufacturing plants. Those plants each probably have property and business interruption coverage. But a single disaster could lead to those insurance companies handing over billions. Catastrophe reinsurance enables them to then pay out on the claims they’ve insured, so that these manufacturing plants can get back to work.” It enables the policyholders to recover, so they can keep goods moving and the economy from grinding to a halt.

Organic Strategies

• Improved Risk Modeling and Analytics Post-2023, companies are making significant investments in enhanced catastrophe models. AI and machine learning better predict the frequency and severity of events. This isn’t merely a matter of updating existing models, it’s a question of adding entirely new sources of data — climate change phenomena and real-time sensor data, for example. It’s about sharpening your perception of the risk, right?
• Product Innovation & Customization: Reinsurers are no longer offering cookie-cutter policies. They are providing more bespoke products, such as parametric covers that provide payouts triggered by pre-agreed parameters of an event (wind speed, earthquake magnitude, etc.) compared to standard indemnity-style claims. It’s about offering solutions that align with the specific needs of individual clients more closely.
• Geographical Spread: One of their key organic steps is to diversify their footprint to new geographies, sometimes even with a lower risk profile. This helps diversify risk and minimize the consequences of a major event in a single domain. Smart move for stability.
• Building Stronger Client Partnerships: Reinsurers are motivated to become more of a consultative partner, engaging closely with clients to better capture their specific risk and patron status to develop strategies. Look beyond the contract, and more towards long-term relationships.

Inorganic Strategies

• Strategic Acquisitions: Some firms have acquired smaller, specialized analytics firms to build their in-house capabilities. Or, even getting its claws into those risk sector specific ones (e.g flood, cyber). This is a fast track to finding success in an industry that is competitive, do you not think?
• Joint Ventures & Partnerships: An avenue to gain access to new data, technology and expertise is through forming joint ventures with technology companies or other reinsurance firms. “It’s about combining resources and skill sets for that competitive edge.
• Portfolio Transfers & Run-Off Transactions: A number of companies are strategically divesting themselves of underperforming or perceived risky portions of their portfolios. It aids in concentrating on the more profit-making sectors. One would think strategy for long-term profitability would be good portfolio management.

The Crystal Ball (Sort Of)

Listen, if I had a sure guess, I wouldn’t be writing this, I’d be sitting on a beach somewhere. But that’s the blehblehbleh for Catastrophe reinsurance going forward, next 5-10 years: we’re headed for a bumpy ride. We’re talking sustained price growth, more likely capacity pinches, and a structural reset in who wants to play in the sandbox. And the wild weather is not going anywhere — and that’s what’s driving everything. Think stronger storms, larger wildfires, and in short, greater risk for everybody. That means reinsurers are being extra careful — and that generally means more expensive premiums for you.

The Whole Picture

Well, we’ve been focusing on Catastrophe reinsurance but do not forget, it’s all just a piece of the larger reinsurance pie. The shifts we are witnessing within cat are requiring the entire market to shift. It’s the canary in the coal mine — what’s going on here usually is a harbinger of where the entire reinsurance industry is headed.

Your Big Takeaway

Honestly? The old methods are simply not effective anymore. You cannot just wing it with your Cat program. And you, and we, need to be proactive. That means having a really good understanding of your exposures, taking a look at new risk transfer solutions, and engaging in some serious conversations about risk appetite. You’ve gotta be nimble and willing to pivot.

So, after all of that … Are you really prepared for all the changes that are coming up the pike? Let me know what you think!