QBE’s Horton: Industry “not getting pricing right” in world of more cat losses

The industry’s failure to price cat risk appropriately over a number of years is why the market is only now “reacting quite heavily”, said QBE’s chief executive Andrew Horton.

In a wide-ranging interview with The Insurer TV on its Leading Voices programme, Horton admitted it’s still “very difficult” to tell if go-forward rates will be sufficient considering the false dawns of previous renewals.

“We thought [pricing] was right last year and the previous year and the previous year … the industry has proven that we probably weren’t charging enough, including the reinsurance world,” Horton said.

He said reinsurers are now “reacting quite heavily” even though 2022 has not been an especially “abnormal catastrophe year with [only] one major hurricane”.

The reinsurance market is facing a capacity crunch with a substantial supply/demand imbalance and thus far only a modest amount of new capital arrival. Indeed, his former company Beazley was one of those, raising £350mn last week and projecting 50 percent property reinsurance rate increases next year (and 15 percent for direct).

“I think it’s the cumulative effect of we don’t seem to be able to get the pricing right in this world of more losses, or when they do happen they cost a lot more,” said Horton. “So I don’t know, and that’s very difficult to actually double down and write even more of it when no one is really certain what the pricing should be,” he added.

In Australia, where QBE naturally has a large presence, the country has been struck repeatedly by natural catastrophe events including record-breaking flooding in southeast Queensland and northern New South Wales earlier this year estimated to have caused insured losses of A$5.56bn ($3.55bn).

“The challenge we have is the size of losses continues to grow,” said Horton. “The weather has been quite dramatically different from being very dry, to being very wet. We’ve tried to work with the government and the ICA [Insurance Council of Australia] regarding mitigation, because we do believe mitigation and spending on mitigation should be higher,” he added.

But while Horton acknowledges pricing needs to go up to match the risk nat cat presents today, he is concerned about affordability and was pleased Australia’s federal government introduced a disaster fund proposal to parliament which will see A$200mn allocated annually for disaster prevention and resilience.

“I think that might be the ultimate solution, because the challenge in the home market is this issue,” he said.

“Of course, we can continue to insure everybody, but is it going to be affordable for everybody if you’re living in a more catastrophe-prone area?”

Amid the increase in catastrophe activity, QBE has been working closely with the government and the ICA to deploy catastrophe-related mitigation strategies.

Horton mentioned the carrier will be a participating member of the government’s A$10bn cyclone reinsurance pool to protect against risks in the northern part of the country.

But rising nat cat losses are not just confined to Australia – it is a global problem.

“Nobody is surprised when it comes to $20bn, $30bn, $40bn, $50bn [losses] and beyond. And at some point, no doubt, we’ll have the first $100bn hurricane,” he said. “You need to have the capital to cover [the losses] and ensure it’s pricing it correctly. It’s going to be a tough challenge, I think,” Horton added.

Holding the line on 2023 cat exposures

QBE registered a $454mn loss related to nat cat in the first half of 2022, having budgeted for losses of $442mn. This compares to a $462mn loss and a budget of $310mn for the same period the previous year.

Horton said during the Leading Voices interview that QBE had planned to raise its cat budget as previous years had shown the amount budgeted had not been commensurate with the increase in cat events.

“At the half year, we said we’re virtually in line with the budget, which is good. So we may have got it right, but it just shows how far out we had been on the budgeting that we had to increase it by so much,” he noted.

QBE announced earlier this week it had revised its forecast for catastrophe losses for the year to $1.06bn as it said it expects to exceed its previous FY22 catastrophe allowance of $962mn.

And the increase in the budget has to be followed by an increase in pricing.

“If we increase the budget, we have to increase the pricing to actually cover the fact that that’s an estimated P&L impact on our P&L this year. And it’s again … how much more can people actually take? Will it be affordable moving forward?” Horton asked.

The US catastrophe market has proven difficult to navigate, given the increasing intensity of events – most notably Hurricane Ian, which caused industry losses estimated at around $50bn.

The industry has been grappling with the mounting losses from natural catastrophes in the region in the past decade, and QBE has been reducing its appetite in this part of the market.

“I think at this point in time, it’s quite hard to tell where the market’s going to go … it may be tough getting reinsurance to actually reinsure against catastrophe exposure, but our view is probably holding or reducing a bit catastrophe appetite in the US, and probably for the whole company to look at the overall cat appetite, holding our position into 2023 rather than looking for major growth or shrinkage,” Horton said.

He added that the outlook in this market is uncertain, and that it will largely depend on the 1 January renewals.

“It’s going to depend on where the reinsurance market goes, and where pricing goes in the new year. And it’s quite hard to tell that at this point in time, because we’re all waiting to see,” he concluded.

Watch the full 24-minute interview to hear QBE’s CEO Andrew Horton on: