MC roundtable: Execs forecast increasingly nuanced prop cat rate rises in 2024

Property catastrophe rates are forecast to rise further during 2024’s reinsurance renewals, but to a lesser degree than that seen this year and with a greater level of differentiation between cedants, senior industry executives have predicted.

During a roundtable hosted by The Insurer in partnership with Lloyds Bank during the recent Rendez-Vous de Septembre in Monte Carlo, TransRe’s president, global underwriting Paul McKeon reflected on the advances made during this year’s reinsurance renewals where broad price rises had been imposed and terms and conditions tightened.

“I feel like an equilibrium has been established in some markets,” McKeon said.

Looking ahead, the executive said “rate rises will continue for US national accounts”.

“Outside of the US, there have been different types of losses, from a variety of perils…There are more issues to contend with, and more rate that’s needed,” he stated.

Sustained peak peril hard market

Kathleen Reardon, CEO of Hiscox Re & ILS, also forecasted continued pricing momentum for property catastrophe business heading into 2024, although significant changes are not needed to either attachment points or wordings given the shifts seen this year.

“I think we've solidified those structural changes for the foreseeable future,” Reardon said, although she added there is a need for “sustained momentum of rate adequacy”.

“We’ll sustain the hard market conditions in the peak perils,” the Bermuda-based Reardon declared.

“Each region is different, and everybody's at a different level of rate adequacy, so we’re definitely not going to take a broad-brush approach, but the conditions that created this hard market are still here.

“Inflation and political instability persist and, in terms of losses, we have had some record breaking severe convective storms in the US for the first half of 2023,” Reardon noted.

“Nothing's changing from a capital perspective. Demand for reinsurance is still going up, [and] capital entering the market has been light,” she added.

Fundamental correction

SiriusPoint CEO Scott Egan said the changes in property catastrophe reinsurance this year were driven by a need for a fundamental correction in the marketplace, the key drivers of which remain.

While insurers have borne the brunt of catastrophe losses during the first eight months of 2023, reinsurers have not been left unscathed.

“In a strange way, I think that’s good for the market,” Egan said, because it highlights the need for further fine tuning.

Egan said given that H1 2023 was painful for many US primary insurers as the natural disaster losses they faced - predominantly from severe convective storms - were not passed onto reinsurers owing to the retentions on their catastrophe programs having increased, structures will be a talking point.

To that end, Egan said US cedants will want to discuss the availability of frequency covers and similar structures, rather than just focusing on pricing and terms and conditions when it comes to their renewals.

“We’re having much more appropriate and sensible conversations with the primary carriers around what type of cover they want and what it is they're trying to protect, as opposed to just shoving the risk from one side of the reinsurance tennis net to another,” he said.

Sustained rate adequacy

QBE Re managing director Chris Killourhy insisted that moving towards 2024, “sustained rate adequacy is key” in renewals for US cedants.

“We’ve got to be able to provide evidence to our capital providers that this is more than one year of sustainability,” he said.

IGI’s newly appointed CEO Waleed Jabsheh agreed.

“There's no way we can just jump to conclusions and say, ‘We've got it right now, this is the right position to be in,’” Jabsheh stated.

“Even if this year ends up generating healthy and above average returns, it's just one year and it doesn’t make up for the last five years of below average, disappointing, and in some cases loss-making, returns generally across the market. We just have to take a pause,” he said.

From IGI’s perspective, Jabsheh said there is an expectation that rates will continue to increase.

“There's a wave that is still going and has legs, and [the market] needs it, otherwise, we're going to end up back in the same position in a couple of years’ time. We don't know if our pricing and structures are right yet.

“It's too early to tell, and we still need time,” he said.

Greater differentiation

While those from the reinsurance underwriting side of the sector made it clear they felt further improvements are needed as the market heads towards 2024, Guy Carpenter global head of distribution Lara Mowery feels the US property catastrophe market “is broadly adequate” given the “significant” changes to pricing, structures and terms and conditions this year.

While not in agreement on the degree of additional change that may occur at 1 January, like other roundtable participants, she agreed the industry has evolved beyond market-wide adjustments.

“We do see a lot of nice differentiation and so we'll see a variety of outcomes at January 1 depending on how the clients are coming into that situation,” said Mowery.

A surplus of capacity should also help stem any major market-wide price rises, the Guy Carpenter executive suggested. The mid-year renewals, Mowery said, saw “a massive bounce back” in the availability of capacity which limited the extent to which rates increased.

Restricted capacity

Hiscox Re & ILS’s Reardon questioned whether that is truly the case though, because if clients had actually bought what they wanted, there would have been a capacity shortage.

“[The cedants] took more risk on their balance sheet as they rebalanced their expectations,” Reardon said.

It is “definitely a better price environment” now than it was heading to the 1 January 2023 renewals, McKeon said, and the TransRe executive suggested that could be why there was more capacity available at mid-year.

Even with the surplus of capacity, pricing did not reduce as reinsurers imposed a minimum of what they deemed to be acceptable.

“While there is capacity and we saw placements 140 or 150 percent oversubscribed, [reinsurers] didn't sign down the price,” he said.

“There is a floor to the price, including on the middle and top layers. And you will see [capacity availability] go from 140 to 80 percent if you reduce the price.”

Investor reticence

Despite the improved market performance, there has not been a wave of new capital entering the sector to take advantage of the elevated pricing.

As Killourhy noted, there is still nervousness among investors about reinsurers’ ability to accurately price their offerings.

“For us to have credibility, we've got to actually show we've got the ability to price the product we're selling,” the QBE Re executive said.

“The thing that makes capital the most nervous is do we genuinely know how to price this product we’re selling. If it's so dependent on whether we have a clean hurricane year, or we have an active year, it's hard for people to get confidence in it,” he explained.

As Lloyds Bank relationship director Michael Smyth noted, from an investor’s perspective, while the reinsurance industry’s performance has improved, better returns may be on offer elsewhere.

“Yes, it’s a lot better, but investor expectations have gone up, interest rates have gone up, and so the cost of capital is significantly higher,” said Smyth.

“When investors look at how the market is performing, they’re not actually seeing the same degree of success as some of the underwriting teams are when they look at their own results,” he added.

That scepticism can be seen in the apparent reluctance from previous industry investors who backed start-ups during prior hard markets in 2001 or 2005 from supporting the new reinsurers currently in the works.

“[Those investors] don't yet believe that this market has proven itself to sustain these returns for a period of time,” said Smyth.

“Do they think they can come in now and this will still be the market in four or five years when they're thinking about realizing some of their positions? And the answer currently is they're very much on the fence on that at best.”

Lack of confidence

In Jabsheh’s view, the capital markets have “a clear lack of confidence” in reinsurers’ ability to adequately price the product and generate a return.

“We've shown that we can lose money for many years in a row, and now we have to show that we can make money for many years in a row.

“In the current economic environment with high interest rates, a lot of people will be sitting there saying, ‘I'd rather not be in the risk business, I can make up the returns elsewhere,’ and that plays against the attraction of our industry,” said Jabsheh.