Although pricing caught most people’s attention during the January reinsurance renewal season, the terms and conditions were restricted, contributing to why Canada’s primary insurers are retaining more risk for high-frequency secondary perils.
“Over the last number of years, there’s been some general upwards pressure on Cat excess-of-loss retentions,” Peter Askew, president and CEO of Canada at Guy Carpenter & Company Ltd., said Wednesday. He presented his point of view as a reinsurance broker on a panel at the Insurance Institute of Canada’s Symposium in Toronto.
“In Canada, if you were thinking about a return period attachment [before the Jan. 1, 2023, reinsurance renewals], it would have been certainly below five years, probably more in line with two or three years. That would have been consistent in across North America in the U.S. as well. There was more noise and pressure to [raise that to] one-in-10, which would have been a very considerable step change.”
In reinsurance, an attachment point is the “coverage threshold,” or the point at which reinsurance kicks in to pay for a primary insurer’s losses. For example, if a reinsurance policy retention is $1 million, that is the “attachment point,” meaning the primary insurer pays for the first $1 million of Cat damage losses and the reinsurer pays for losses exceeding that attachment point.
Attachment points are also expressed in terms of frequency of losses. So, for example, if a primary insurer has an attachment point of one-in-two years, the reinsurer pays for Cat losses a primary insurer would incur for loss events predicted to happen once every three years or more.
By increasing the years of their attachment points, reinsurers are signalling they are more interested in covering primary insurers’ high-severity losses rather than their high-frequency losses. For example, they are only interested in covering Cat loss events predicted to occur once every 10 years or more.
This movement of attachment points is in response to the rise of high-frequency losses related to so-called ‘secondary perils” such as wildfires, floods, and convective storms (i.e., thunder, lightning, heavy rain). Globally, insured losses in 2022 totalled $140 billion US, of which $73 billion was for secondary perils, according to a report by Gallagher Re, Gallagher Re Natural Catastrophe Report of 2022 – January 2023.
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In Canada, insurers paid out for $3.1 billion in NatCat damage in a year that saw only two major events – a derecho in Ontario and Quebec ($1 billion) and Hurricane Fiona in Atlantic Canada ($800 million)
“Climate change is probably one of the bigger pressures [on the P&C industry],” said Stephanie Russell, senior vice president, chief agent, and branch manager for TransRe in Canada. “We are seeing increased frequency in the number of Cat events in this space over the last little while. And volatility is one of the bigger things from the reinsurance side.
“A lot of the attachments on some of the Cat programs are quite low. And as reinsurers, we don’t feel like we should potentially take that burden on all the time. So, we’re looking to find partnership, the right balance is where we want to be, and in sharing the risks and exposures that we have with our insurance partners.”
Askew commented on what increasing the attachment points from two or three to five or six years would mean for primary insurers. “For a company, that could mean an additional $50 million, $75 million or $100 million of further retention, which is very substantial to their financials, into their P&L’s.”
Moving attachments to 10 years “would have been a massive change for most companies, year on year, and in our observation across our portfolio for Canada,” Askew said. “So, in the U.S. market, about 60% of programs saw an increase in their retention. I would say Canada was significantly higher than that in terms of moves on overall retentions.”
This then raises the question of what happens in Canada if 2023 turns out to be another challenging Cat year. So far this year, Catastrophe Indices and Quantification Inc. (CatIQ) has reported two natural catastrophes but declined to give a running total since claims losses are still being tallied for April 2023 ice storm in Quebec.
Feature image courtesy of iStock.com/cjp
