David Flandro joins The Political Risk Podcast to discuss rising risk, falling prices and the reinsurance paradox

Reinsurance pricing is falling at a time when many of the risks surrounding the market are moving in the opposite direction.

David Flandro, Head of Industry Analysis and Strategic Advisory at Howden Re, joined David Benyon on The Political Risk Podcast to discuss the thinking behind Howden Re’s Breaking the Glass report, what could change the direction of the reinsurance cycle and why geopolitics is becoming increasingly important to how the industry thinks about risk.

For David, today's market presents a clear paradox. Reinsurance is coming off historically high pricing and capacity remains plentiful. At the same time, geopolitical risk, interest rates and the wider cost of capital remain elevated.

David notes that cedants have an opportunity now to reconsider how they use today’s market to prepare for what comes next.

Prepare for more than one outcome

History provides plenty of reminders that market consensus can change quickly.

Howden Re's Breaking the Glass research looks back across 100 years of combined ratio data, covering periods from the Great Depression and oil shocks to liability crises, the global financial crisis and COVID-19.

“What we learned is that the prevailing wisdom on market direction is always correct until it isn't,” David said.

Market turns rarely come from one event. They tend to emerge when several pressures converge.

Howden Re Market Signal allows clients to explore that relationship by changing assumptions around factors including dedicated reinsurance capital, interest rates and loss levels to see how different scenarios could affect the direction of the market.

The current signal suggests it would take a significant combination of events to change the pricing trajectory. But history also shows why relying on the prevailing view has its limits.

“The prevailing wisdom is, we're overcapitalised, we've got lots of profit, things are going to keep going the way they are. And that's probably true. But I'm just saying that the tail case is probably fatter than people realise.”

For cedants, that makes today's conditions a chance to consider the protection and options they may want if the assumptions behind the current market change.

Geopolitical risk goes beyond insured losses

The conversation also examines the conflict in the Middle East and its implications for insurance and reinsurance.

Direct losses matter, particularly for political violence, war and marine. But David argues that the effects of geopolitical shocks can travel much further.

“If I had to crystallise it, I would say the biggest effect that's taking place in the reinsurance and insurance markets around the Strait of Hormuz, it's not necessarily in the discussions that we're going to have around pricing, hours clauses and terms and conditions, although those are important. It's not even the actual size of the loss. It's the oil price. It's the interest rates. It's the broader effect on risk premium.”

Those wider effects can influence financing costs, investment portfolios and the economics of underwriting – another part of the paradox between falling reinsurance pricing and rising risk elsewhere.

Geopolitics is changing how the industry analyses risk

The way clients think about risk is changing too.

Traditional catastrophe and financial modelling remain fundamental. But David says clients are putting more focus on geopolitical issue tracking, scenario planning, political risk insurance and dedicated expertise.

“Underwriters and reinsurance buyers are acutely aware of this, and they expect us to be able to advise them on it.”

The full episode goes deeper into each of these questions. David discusses the implications of conflict in the Middle East, what Howden Re Market Signal tells us about the pressures that could change the current pricing trajectory and why the economics of reinsurance matter as the cycle develops.