Underwriting technology is the solution to rising reinsurance rates — here’s why

The reinsurance market is facing a challenging environment, with the property sector particularly impacted by an imbalance of supply and demand. According to a recent interview with Guy Carpenter’s chairman David Priebe, reinsurers reduced or have withdrawn their property capacity in 2022, leading to a scarcity of supply and an increase in pricing.

He noted that risk-adjusted pricing has increased by an average of 40–60 percent in North America and 25–35 percent in the UK/Europe, with 20–50 percent in the Asia-Pacific region and low double digit rate increases in EMEA. Additionally, attachment points, which have not been adjusted for a long time and have recently seen large increases in valuations, have been a focal point for many reinsurers.

These trends validate several 2022 forecasts for high rate increases — largely to protect underwriting margins against rising claims. In the case of property, this has largely been driven by insured losses of about $120 billion in 2022 and the increasing frequency and severity of natural catastrophe claims. Hurricane Ian alone is likely to have caused between $35 billion and $55 billion of insured claims, making it one of the costliest natural catastrophe events ever. This claims activity, coupled with limited retrocession capacity, will continue to put upward pressure on property cat premium rates.

The high demand for reinsurance capacity and its subsequent rate increases has not been limited to CAT property. Other lines experiencing large rate increases include specialty lines like marine and aviation, which have been most affected by the war in Ukraine. Motor hull premium rates also continue to increase in response to high spare-parts price inflation. According to Fitch, claims inflation has not been as impacted by social or general inflation yet, but this is likely to change in 2023, with negative implications for underwriting margins and reserves.

How can carriers respond?

Given these challenging market conditions, carriers need to demonstrate both strong results and discipline in their underwriting in order to secure better rates and terms. One way to do this is by leveraging advanced technology that’s designed to support underwriters and ensure superior underwriting decisions.

Recent advances in artificial intelligence, natively embedded in platforms such as Kalepa’s own Copilot underwriting workbench, help underwriters understand the exposures and controls of a business in detail. By parsing through mountains of internal and public data, Copilot allows underwriters to identify the “needles in the haystack” that make the difference between a highly profitable and unprofitable book. Copilot also ensures complete compliance with guidelines and authority letters — not to mention real-time management and visibility of the entire portfolio.

Carriers using Copilot have reported improvements of 10% in combined ratio, a clear demonstration of high underwriting quality. Furthermore, the transparency afforded by Copilot’s management capabilities enables detailed reviews of book performance by geography, sector, or channel that go far beyond the traditional bordereaux. Combine this improved underwriting performance and increased performance visibility with automated guideline adherence and carriers have a new tool to demonstrate both results and discipline to their reinsurance partners.

In this challenging capacity environment, carriers can differentiate themselves by demonstrating their strong underwriting capabilities to reinsurers, and advanced technology such as Copilot can play a key role in this process. By identifying and mitigating risks, improving underwriting and pricing strategies, carriers can secure better terms and pricing for their business.

‍