This year, insured catastrophe losses have already exceeded $100 billion and are expected to easily breach the $120 billion mark, but with reinsurers poised to generate underwriting profits on their global catastrophe portfolios in 2024 after the significant market reset last year, industry losses will continue to be realised by primary insurers in 2025, according to Peter Zaffino, Chief Executive Officer (CEO) of AIG.
Providing high level expectations for the fast-approaching January 1st, 2025, reinsurance renewals during AIG’s third quarter 2024 earnings call, CEO Zaffino predicted an orderly and healthy reinsurance marketplace.
“The significant reset in the property cat reinsurance market in 2023 means that reinsurers generally have higher attachment points, provide named perils and have significant retro protection,” said Zaffino. “And, therefore, are likely to make an underwriting profit on their global catastrophe portfolios in 2024, given the current loss levels and the benefit of reinstatement premiums. With this expectation of underwriting profit, the overall reinsurance market should remain healthy.”
Although the reinsurance market is generally strongly capitalised, the CEO expects discipline to remain at 1.1 2025, with no reduction to attachment points, and a focus on deploying capital to the insurers with higher quality portfolios.
“Given that this has become the industry norm ($100bn+ of annual insured cat losses), as I mentioned earlier, industry losses from increased frequency and severity will continue to be realized by primary insurers and will not be solved by the reinsurance market in 2025,” added Zaffino.
During the Q&A, Zaffino reiterated that he does not foresee attachment points coming down next year, but that he does expect the market to be orderly.
“What I was trying to outline in my comments was that most of it is retained by insurance companies today, and so, therefore, how we’re going to price business going forward, how we’re going to understand the frequency of cat is going to be really important to do as an insurance company, and not rely on reinsurance,” explained Zaffino.
In terms of AIG’s own use of reinsurance for its property book, Zaffino asserted that he doesn’t expect a material change to the structure.
“Of course, we have low attachment points. It’s very complex, and I won’t spend a lot of time on it, but we certainly have the balance sheet, we certainly have the risk appetite to take a little bit more net in the event that we want to. But we like having low attachment points on severity, and we like having our aggregate that protects us from frequency. And so, we manage our net according to our risk appetite. It’s within expectations, and I would expect us to continue the same strategic philosophy,” he said.
Over the past five years, global insurer AIG has worked to transform the business, and this includes efforts to manage volatility via gross underwriting actions and the firm’s use of reinsurance.
During today’s earnings call, Zaffino highlighted this and provided some insightful details on the impacts of some of the changes on its financial performance and balance sheet.
Using 2012 as a reference point, which was a meaningful year with total insured catastrophe losses on a nominal basis of $65 billion (roughly equivalent to the 20 year average), Zaffino noted that expectations for annual industry catastrophe losses have since grown substantially.
“The average annual industry loss from natural catastrophes from 2017 through 2023 has increased approximately 90% when compared to the average from 2000 to 2016. Since 2017, seven of the last eight years, including the 2024 forecast, have had over $100 billion of annual insured losses,” he said.
“It’s important to note, against this heightened level of natural catastrophe losses, based on published reports, we estimate approximately 50% of the insured natural catastrophe losses were absorbed in the reinsurance market from 2017 to 2022. However, following the major market reset in 2023, approximately 90% of the losses were retained by the primary insurance companies, and this is a significant change,” added Zaffino.
Against this backdrop, the CEO went on to provide some specific points to contextualise the magnitude of the impact from the changes of AIG’s approach to both underwriting and reinsurance.
“Based on AIG legacy underwriting strategy and reinsurance choices in 2012, AIG posted an initial pre-tax loss of $2 billion from Super Storm Sandy, which represented almost 7% of the estimated $30 billion market loss for that single event. And for the full year 2012, AIG recognized approximately $2.7 billion of losses, or approximately 4% of the market losses.
“Today, AIG is forecasted to be within our catastrophe loss expectations for the full year, or, more importantly, less than 1% market share of the forecasted total industry loss for 2024 of over $125 billion,” explained Zaffino.
This is quite the change and testament to the actions taken by the company. Further, explained Zaffino, AIG’s property portfolio net premiums written are approximately the same amount in 2024 as they were in 2012, although today the carrier has 80% lower cat losses and volatility.
“We’ve completely transformed our business over the past five years, and this is the new AIG,” he said. “AIG’s strategy to manage volatility through our gross underwriting actions and our approach to reinsurance, including our decision to maintain the lowest net retention amongst our global competitors, has delivered significant benefits for the company and positions us well for the future in an environment with significantly elevated insured loss activity and modelling uncertainty.”
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