Sompo International’s Donelan: Hard property market will influence capital deployment in casualty

The expected hard market in property cat reinsurance at 1.1 will offer underwriters a “fair chance of a fair return” and may also impact capital allocation to casualty quota shares, potentially putting downward pressure on ceding commissions, according to Sompo International global reinsurance CEO Chris Donelan.

Speaking to The Insurer TV as part of our Close Quarter series, the executive said his company has appetite for catastrophe risk and will write the business “at the right underwriting ratios”.

“Having said that, as losses develop and new losses happen you look at it week-to-week and day-to-day, and you have to make sure you’re putting the capital in the right spots for the right return,” said Donelan. 

He added that a disciplined underwriting approach is key to making sure a reinsurer is well-positioned to “go forward strategically and put capital in play in an area that could give you a fair chance for a return”.

“We think we’re getting to a fair chance of a fair return in property, we’ve felt like we’ve been getting that in casualty for the last couple of years, but we also feel like that can turn pretty quickly,” the Sompo International executive said.

Donelan highlighted the demand-supply imbalance in property cat reinsurance that had already been in place before Ian made landfall at the end of last month. And he said with inflation driving significantly more demand for limit from insurers, the big questions now are around reinsurer appetite, where there has been a visible shift in sentiment in the market.

“I think a number of capital providers are feeling uncertain. They’re exhausted from the last six years where they’ve expected each year to be better, and it’s turned out that each year has been relatively worse.

“I think the fact is that it’s going to be very hard to quantify people’s willingness to participate in a cat market or any other line that they can’t see a return for a decent period of time,” said the executive.

In casualty, Donelan highlighted the attractiveness of the most recent underwriting years with pricing and terms ahead of trend.

But he warned that for those insurers writing the more challenging years towards the end of the last soft cycle, there are concerns about how much prior-year development will come through from those cedants.

“That’s actually causing your calendar year to be not as good as you’d like it to be. So, I think the effect of a hard property market will have people look at the capital they’re putting into the casualty area.

“And I expect terms will not be improving from a ceding commission perspective … so you’ll probably see some pressure on that. I think that’ll be company-by-company, treaty-by-treaty, and I think you’ll see some stabilisation in that area,” Donelan continued.

Also in this 12-minute interview, hear from Sompo International’s Donelan on:

  • Early read on Hurricane Ian impact
  • Casualty reinsurance renewal dynamics
  • Renewal strategy for reinsurers
  • Driving profitable growth
  • Cyber becoming a core reinsurance product