The Great Overshoot
Why Reinsurance Pricing detached from reality—and how to fix it.
The global insurance market is under pressure, but the story is more complex than the headlines suggest. While external volatility from climate and economic factors is real, the data reveals a stark truth:recent pricing has overshot actual risk requirements.
This "overshoot" exposes the fragility of manual pricing models and highlights the urgent need for tools that adapt to data, rather than reacting to panic.
Visualizing the Cycle
Interactive Chart: Hover or tap points to see details
Evidence of the Overshoot
The period from 2017–2022 was undeniable chaos. Catastrophe losses like Hurricane Ian ($67B) and investment volatility justified a correction. However, the market's reaction in January 2023—with retrocession rates rising 50%—swung the pendulum too far.
The financial results for 2023 prove that pricing exceeded risk-adjusted requirements by a wide margin:
| Metric | 2023 Result | Benchmark | The "Overshoot" |
|---|---|---|---|
| Global Reinsurance ROE | 22.0% | 8.1% - 9.5% | Profit was 2.5x the cost of capital |
| Combined Ratio | 95% | < 100% | High underwriting profit margin |
The Reality Check: This level of profit signals pricing that isn't just covering risk—it's actively repelling clients. The market softened quickly in 2024 (dropping to 5-10% increases) because the 2023 rates were unsustainable.
Case Study: The Cyber Market Swing
Nowhere is this "panic-then-profit" cycle clearer than in Cyber insurance. After a spike in 2020 losses, carriers raised rates so aggressively that the loss ratio collapsed, indicating they were charging far too much for the risk.
The "Climate" Narrative vs. Data
A major justification for the 2023 price hikes was escalating climate risk. However, academic research suggests we are misidentifying the culprit. The primary driver of disaster losses is not the weather itself, but where and how we build.
| Loss Driver | Industry Narrative | Research Reality |
|---|---|---|
| Exposure GrowthPopulation & Wealth in high-risk zones | Undervalued (~25%) | Primary Driver (~50%) |
| Climate IntensitySeverity of weather events | Overweighted (~60%) | Secondary Driver (~20%) |
* By conflating exposure growth with climate change, the industry justifies higher premiums while ignoring the positive impact of modern building codes.
The Fix: Adaptive Pricing
To avoid these boom-and-bust cycles, carriers must move beyond manual spreadsheets. Modern pricing engines prevent overshooting by ensuring clarity, speed, and fairness.
Granular Transparency
See exactly how capital charges and margins build up the price. This stops "buffer stacking," where every department adds a safety margin until the price becomes uncompetitive.
Rapid Re-calibration
When loss trends shift, update assumptions instantly across the organization. No more "pricing lag" that leads to massive corrections years later.
Reward Resilience
Easily factor in mitigation efforts (like flood defenses). This attracts better risks and incentivizes customers to protect themselves.
The market winners of the next decade won't be the ones with the highest rates in a crisis—they will be the ones whose pricing engines are transparent, adaptable, and rooted in reality.