Property cat reinsurance teeters on edge of true hard market

The Atlantic may have been quieter than usual so far this hurricane season, but an inflation-led perfect storm is brewing for property cat reinsurance which is sure to dominate discussions in Monte Carlo this week as brokers begin the task of trying to line up sufficient capacity to get their clients home in the key 1 January renewal season.

After a mid-year renewal that for many cedants – especially in the Southeast US – was the hardest and most challenging in memory, the consensus is that the broader cat treaty sector is not yet in true hard market territory.

But the strong expectation is that the key dynamics at 1 June and 1 July will dictate the outcome of the upcoming renewal too, with reinsurer retrenchment (see below) coinciding with growing demand from buyers amid concerns on both sides over the impact of climate change and surging inflation.

At many Rendez-Vous past the typical pattern around cat discussions – at least in public – has been posturing from the continental giants on the need for rate, and a counter from brokers on the abundance of capital in the sector.

This time around there is likely to be little in the way of posturing or drawing of lines in the sand from either side of the divide, however.

Instead, reinsurance intermediaries, clients and reinsurers are expected to focus on areas such as the serious business of setting realistic expectations about appetite across perils and territories and getting agreement on what the impact of inflation means for exposure and how that should be priced into renewals.

As one senior reinsurance underwriter told this publication: “Even if it does run clean I think the market is still going to be tight – and god help us if there’s another bad year. If we’re not in an actual hard market now it’s pretty darn close, but are programs not getting placed? I think they are but not by a lot.

“Let’s see how people recalibrate their aggregates and appetites for 1.1.”

There is a broad consensus on the dynamics driving the imbalance between supply and demand in property cat reinsurance.

Aon’s Reinsurance Solutions CEO Andy Marcell sums them up as inflation, concerns over the impact of climate change on peak and secondary perils, a lack of confidence in models, stress on capital from investment volatility and the impact of the strong dollar.

“There’s uncertainty and when there’s uncertainty people want to charge more for that uncertainty,” he observes.

And in Guy Carpenter’s pre-Monte Carlo briefing the firm highlighted “clear capacity constraints” in property cat and retro across the global marketplace.

After 2021 turned out to be another year of mid-sized cat losses exhibiting a meaningful amount of model miss (think Texas freeze, European flooding, December derecho/tornado outbreak and a double whammy hurricane in Ida that went through Louisiana cat towers and delivered heavy flood losses to the Northeast), the 1 January 2022 renewal largely set the tone for what was to come.

Years of talk by reinsurers finally turned to walk, as in Europe property cat treaty writers held their nerve to drive significant rate, with the largest increases seen in more than a decade, including XoL hikes of 15-50 percent on layers hit worst by flooding in Germany, Austria, Belgium and Switzerland.

The emerging theme at the broader renewal was of reduced reinsurer appetite for cat risk, reflecting the impact of secondary perils and concerns over climate change.

The dearth of capacity was most noticeable in lower layers of cat programs as reinsurers sought to move up the tower towards the tail risk and away from the frequency and attritional losses that have blighted underwriters for a number of years.

And unlike in previous renewals, there was no softening of the resistance from reinsurers at the eleventh hour.

Since then, the pendulum has swung further, driven by specific regional challenges in areas like Florida and Australia, but also the significant impact of macroeconomic headwinds battering the sector.

Capital markets volatility and higher interest rates have had the effect – at least in the short term – of reducing reinsurance industry capital.

Although there are a range of methodologies around what constitutes reinsurance capital that can actually be deployed to risk, there is a rough consensus that mark-to-market investment losses at carriers have effectively reduced the size of the industry balance sheet by between 10-12 percent.

While some of that hit may reverse by the time renewal discussions reach the critical point later this year, volatility on the asset side of the balance sheet shows no sign of dissipating any time soon.

That means the balance sheets of reinsurers to support cat risk are diminished at a time when exposures are getting an automatic uplift because of inflation, while demand for limit is rising and many carriers are still set on managing down their aggregates and PMLs.

As Howden’s head of analytics David Flandro commented recently, the 10.7 percent fall in dedicated reinsurance capital his firm tracked at the halfway point of 2022 has “huge implications” for capacity, pricing and strategy going forward.

And Guy Carpenter’s global head of distribution Lara Mowery said that inflation alone is expected to lead to “one of the broadest shifts the [property reinsurance] market has ever experienced in a single year”.

“For a reinsurer to renew their existing business, they must plan for this fundamental shift in exposure and be prepared to absorb additional expected losses across their portfolio,” she added.

Territorial differences

In Florida and other parts of the Southeast this year, the broader climate of fear around cat risk was compounded by territory-specific factors such as the dire litigation-driven operating environment in the Sunshine State.

That drove a true hard market where for some buyers capacity could not be secured at any price, let alone one they could afford, leading to a slew of corporate failures.

For large, national or global buyers the picture was rather different, with their needs geared less towards hard-to-find low-attaching limit and more towards buying more cover up top or in coinsurance layers in the middle of structures, as they sought to offset rising exposures on their portfolios from the impact of inflation.

The Japanese-focused 1 April renewal was largely stable, after compound rate increases in previous years in response to back-to-back heavy typhoon seasons. That was in contrast to Australian renewals, where significant loss activity led to meaningful rate increases.

Guy Carpenter’s US property cat rate-on-line index increased nearly 15 percent year on year, while its Asia index was up 9.5 percent.

Those shifts through mid-year in key geographies also had a material impact on Guy Carpenter’s global property catastrophe rate-on-line index, which grew to an estimated increase of 15 percent, accelerating from the 1 January figure of around 11 percent (see chart).

Territorial differences will inevitably play out across the key renewal dates during 2023 as well.

But the resolve of the reinsurance market is likely to remain strong as the overarching dynamics driving current market conditions hold firm.

One of the most senior executives at a global reinsurer told this publication in the lead-up to Monte Carlo that his company would not be giving any ground in Europe on renewals from the rate it had worked so hard to claw back at the 1 January 2022 renewals.

The stance will be held despite a comparatively light year for losses on the continent so far, with the exception of French hailstorms in early summer that could trigger cat treaties.

Sources ahead of the Rendez-Vous were typically estimating European treaty rate rises in the 5-10 percent range to account for inflation, adding that there is likely to be an increasing amount of attention paid to composite treaties.

Swiss Re CUO Thierry Léger echoes this message in our lead interview, saying the market will go from “hard to even harder”.

Brokers are, by nature, typically reluctant to predict rate rises but senior leaders appear to be striking a realistic tone.

Gallagher Re global CEO James Kent told The Insurer TV this month that property cat renewals at 1 January will likely mirror some of the dynamics seen at mid-year, with peak zone business under the most pressure.

He was wary of calling a potential capacity crunch, however, with that outcome dependent on what happens through the rest of 2022 on the catastrophe front.

Meanwhile, Howden RE commented: “2023’s reinsurance renewal cycle will see further pricing pressures, irrespective of whether the wind blows or not.”

No new capital and no new retro

In contrast to previous hard or hardening property cat markets, there is no sign so far of any meaningful new capacity entering the fray, either from traditional start-up reinsurers or capital markets vehicles such as new ILS funds or sidecars.

Sources have been sceptical that new entrants of sufficient scale to tip the balance back in favour of buyers will emerge between now and next year.

And the tight market for retro does not look to be easing any time soon.

As one senior reinsurance broking executive put it: “There’s no point in talking about what reinsurers have been doing historically in terms of arbitraging retro and low-down aggregate covers, because that was the story of the last few years.”

The reality for reinsurers is that the availability of aggregate or proportional protection to allow them to offset growing net positions and increase their appetite on a gross basis will be extremely limited.

“That may change if there’s no loss and if reinsurers can articulate a great opportunity for those capital providers, but right now it’s pretty stable in the sense that money is not leaving, but it’s not coming in either,” they continued.

The growing few

Appetite for cat among reinsurers is not down across the board, however, despite the overall sense of a market in retreat.

For some – like Axis, which followed Markel by exiting property reinsurance on its own balance sheet – the retrenchment was total. For others, like early signaller Axa XL with its strategic move to cut PML, or RenaissanceRe with its Florida-specific pullback, cat appetite remains, and they may look to grow selectively at the right price for the right risk.

Others have been more explicit in their desire to grow.

Going against the traffic in Florida, Arch CEO Marc Grandisson reported that the Bermudian selectively expanded its writings in the Sunshine State as it eyed property cat rates up by more than 30 percent and grew its 1-in-250-year event PML.

“Rate pressure was evident also beyond Florida. However, we will need a few more quarters to confirm we are facing a hard property cat marketplace,” he told investors on the company’s Q2 earnings call.

Meanwhile Andrew Rippert, CUO at Aspen Reinsurance, told The Insurer TV that the group will target property lines – especially property cat – for margin growth.

Rippert said that Aspen will look to strengthen its position in property at 1 January by capitalising on the “best opportunities”.

“So property catastrophe in particular … there’s a dearth of capacity out there in the market, the prices have firmed up,” he observed.

In a study released late August, S&P Global Ratings reported that reinsurers are “of two minds” about whether to grow natural catastrophe exposures this year despite rising rates.

It noted that the aggregate cat budget for the top 21 global reinsurers rose by 20 percent to $15.5bn, providing further buffer against “exceptional” shock events.

The rating agency said reinsurers may be tempted in 2023 to further deploy capital into the property catastrophe line as demand continues to rise. But it added that cedants will continue to shy away from volatility and more reinsurers may decide to reduce their exposure to property cat while diversifying into lower-severity lines.

“Reinsurers that have been more cautious during the recent turbulent times may decide to follow a more opportunistic trend,” the firm continued.

And Guy Carpenter’s Mowery was bullish about the prospect of reinsurers stepping up to the plate to show more appetite for cat.

“Driving this momentum is the reality that the market is shifting based on evidence we’ve seen at mid-year. As market adjustments continue recognising current conditions, we would say that now is the time to lean into the market, and many are doing just that,” she added.