The pressure is on: market forces at play 1/1

Marcus Winter (00:01):

Hello and welcome to Nothing Assumed, a quick talk on topics that keep the reinsurance industry up at night. My name is Marcus Winter, and today it is my pleasure to welcome my colleague, Kerri Hamm, as my guest. Kerri is head of business development here at Munich Re US, and together we want to talk about the current state of the market and what can, we can expect for the 1/1 renewal season. Kerri, welcome and thanks for joining me.

Kerri Hamm (00:25):

Thank you, Marcus. It's a pleasure to be here.

Marcus Winter (00:27):

Everyone at the moment looks at the economic developments and the uncertainties, interest rates going up. What is it that you see as the two key factors that play out on the insurance and reinsurance market today?

Kerri Hamm (00:41):

Yeah, so there's quite a few short and long-term risks for the in- insurance and reinsurance industry. But I think there's two key concerns for 1/1, first, inflation, and second, CAT capacity.

Marcus Winter (00:54):

Oh, that's very interesting. Let's dig maybe into the inflation. What do you see as the main drivers there?

Kerri Hamm (01:00):

Yeah, so is the, there's the headline inflation number, right. The Consumer Price Index tells us the price changes are the highest that they've been in 40 years, and that's important. But what's even more important for insurers is that, um, construction materials are 30 to 55% higher than they were pre-pandemic. Wages and labor for construction, 10 to 15% higher that, you know, just over the past year. Um, in terms of auto, Manheim Value Index tells us that used car values are 70% higher than they were pre-pandemic. Motor vehicles parts and equipment, 20% higher than pre-pandemic. So certainly, these inflation numbers, um, are much more intense for insurers.

Marcus Winter (01:48):

And much higher than the average CPI that already is very high.

Kerri Hamm (01:51):

Absolutely.

Marcus Winter (01:52):

How about medical inflation?

Kerri Hamm (01:53):

Yeah, so medical inflation is also on the rise, albeit not rising as fast as construction materials, auto parts, and related labor. Um, medical price inflation in 2022 is estimated to be about six to seven percent so definitely lagging a bit, the CPI.

(02:10):

Um, however, something to consider is that labor and wage rises will be an interesting trend going forward. Um, most labor contracts for nurses and other hourly, um, hospital employees are tied to consumer price index. So that means that labor costs, um, which drive medical inflation, will rise, um, as those contracts come up for renegotiation.

Marcus Winter (02:35):

Is your second concern you mentioned property CAT capacity?

Kerri Hamm (02:38):

Right.

Marcus Winter (02:39):

Um, when you look at the sup- at the demand for the, for the property CAT capacity, w- what are the main drivers that you see there?

Kerri Hamm (02:47):

So obviously, inflation drives claim costs, but inflation also drives up insurable values. And it's been widely reported that insurers collectively bought roughly $5 billion additional capacity during the spring renewal season to take care of that increase in value. However, we expect more insurers to reevaluate their purchases this fall, adjusting again upwards to, um, take care of their insurable values.

(03:14):

A compounding problem to this is unrealized investment losses that have been created by mark-to-market challenges over the past months and also coupling with that model changes. So we estimate going into the fall that there will be at least as much additional CAT capacity need as we saw in the spring and probably even more.

Marcus Winter (03:33):

And who will supply that additional capacity? Is the traditional reinsurance market, um, ready to do that? Or do we need, um, a growing non-traditional reinsurance market for that?

Kerri Hamm (03:43):

This is the rub, right. So on the supply side, traditional reinsurance capacity as definitely retracted. Uh, we're seeing and hearing a lot of high profile reports of reinsurers significantly reducing or exiting catastrophe reinsurance in response to lack of profitability, increasing volatility in the space over the past five years.

(04:03):

Non-traditional reinsurance capacity, which you mentioned, is a lot more opaque to track. So we don't have exact numbers. But this segment of the market also seems to have retracted compared to the recent past. And pricing multiples and spreads on CAT bonds have increased significantly in the first half of 2022 indicating a lack of supply in the CAT bond and, and possibly ILS area as well.

Marcus Winter (04:31):

And it's good to see that we can keep our capacities stable, and that we do not want to, need to retract, uh, from this market. Thanks for clarifying. Um, when you look at our own portfolios, what is it that we focus on when we look at allocating capacities? And what are the companies that you want to closely team up with?

Kerri Hamm (04:52):

That's an excellent question. So in a nutshell, longevity, transparency, high-quality underwriting and claims are all critical for Munich Re. We are really committed to our long-term business partners. We have wonderful clients who've been with us for 30, 40 years, some much, much longer. We know their management teams extremely well so we understand the direction from the top, and how it's being executed on a divisional level. We know the underwriters and have good dialogue with them on risk appetite, rate change measurements, and market conditions. We know their claim staff and how they're managing cases. We know who to call if we're missing a [inaudible 00:05:31].

(05:31):

That kind of trust is really important to be successful in this business. Our clients and brokers understand that transparency and good communication are key for win-win outcomes with Munich Re. Yes, we ask a lot of questions, but it's for a reason. We wanna fully understand the exposures, especially in an environment like this where volatility and uncertainty are higher than they've been in the past. Without a full understanding of the risk, exposures, and how they're managed, we won't be able to get comfortable enough to put our capacity down.

(06:04):

So we're also looking for clients who invest in their underwriters and claims adjusters, companies who encourage their staff to be the most knowledgeable and the best in the business. After all, our business model essentially relies on our clients' underwriting and claims handling at the end of the day.

Marcus Winter (06:20):

Thank you. That makes a lot of sense. If we talk about the quality of the portfolios that you want to attract, what do we offer in return?

Kerri Hamm (06:28):

So we spend a lot of time thinking deeply about what we bring to the table as Munich Re. We're a large company that can be difficult to navigate sometimes. But during periods of high volatility and uncertainty, a large company like Munich Re really shines with all we have to offer. A large, stable, high-quality balance sheet, a global footprint, many experts in all lines of business, the ability to handle large and complex transactions, great analytics tools, the best talent in the industry to understand the risk, quantify the risk, and to provide feedback to our business partners.

(07:07):

Beyond risk analysis and quantification, we also recognize that there are other soft needs in the industry. And we regularly jump in to help our clients and brokers with industry topics such as diversity, equity, and inclusion and ESG. And we also run a great global insurance learning and development program each year to help educate our clients and help their high-potential candidates to really grow in their careers.

(07:32):

So Munich Re in my view is the total package. A high-quality financial security, paired with top-notch expertise and people who care really deeply about partnering with our clients and brokers on win-win outcomes.

Marcus Winter (07:45):

Total package sounds nice. Um, and I share your perspective. This is a flight to quality in both directions. Here's my last question, Kerri. I ask this to all of my guests. If you had a magic wand, what would you change about the 1/1 renewal market?

Kerri Hamm (08:02):

Marcus, that's really easy. Given the dynamics shaping up for the 1/1 renewal season that we talked about earlier, I would love to quadruple our Nat CAT budgets. As our clients recognize the need to increase their placements in reaction to increasing values, there will actually be too many good opportunities with high-quality clients and brokers. I really hate to have to say, "Sorry, we can't do that." However, looking at the increasing demand and knowing that our capacity will remain stable, it will only be inevitable that we have to turn away some deals or not be able to extend further on others.

(08:36):

So assuming you're not gonna let me quadruple our Nat CAT budget, maybe a more realistic wish is for our clients and brokers to come to us as early as possible with their requirements and try to be as realistic as possible about terms and conditions. That will ensure that we can do as much as we can to help in what will be a very challenging 1/1 renewal season.

Marcus Winter (08:57):

Kerri, I really enjoyed our chat today about, um, the key market [inaudible 00:09:01] will play a role in the upcoming renewal season.

Kerri Hamm (09:03):

Me too. Thank you, Marcus, very much for having me.

Marcus Winter (09:06):

It certainly will be a challenging renewal season. Um, and I'm fully with you that we need to get the ball rolling early. Stay tuned as next time I will be talking with Maura Haynes. She's head of casualty at Munich Re US, and we will tackle the key issues associated with social inflation. Bye for now and see you next time on Nothing Assumed.