Outside certain defined peak zones such as Florida or Japan – at least after a major typhoon loss – rates have struggled at renewal despite the increased frequency of global cat losses since 2017.
Despite tough talk from reinsurers, the 1 January 2020 and 2021 renewals both disappointed as hopes of traction – especially in Europe – were dashed by plentiful capacity and weak resolve from underwriters. At the eleventh hour, the reinsurers blinked.
But this year was different as reinsurers walked the walk as well as talked the talk.
The build-up through the conference and Q3 earnings season saw a unified message from the leadership of property (re)insurers that capacity would only be deployed for the appropriate rate in a world where the nature of cat risk appears to be changing as frequency and severity of losses continues to escalate.
This year was different as reinsurers walked the walk as well as talked the talk
In fact, one could argue that perhaps for the first time since the aftermath of the 2004-05 hurricane seasons, the property cat sector appears in lockstep about a revised view of risk.
Underwriters at insurers, reinsurers and retro shops are feeling the pain of a sequence of heavy losses that means for some there have been no profits generated from writing cat in five years. This has not happened for two generations.
It is natural, therefore, that it is leading to questions about capacity deployment right up through the chain.
Primary insurers are repositioning portfolios to move away from areas that have delivered the most losses or shortening limits and looking to raise deductibles.
That is driving strong momentum in commercial property cat insurance pricing even after several years of increases, while homeowners rates are also moving up meaningfully in loss-affected territories.
Retro capacity has walked away from aggregate structures and low-down occurrence layers, leading to another round of meaningful price increases where ultimate net loss limit is available.
And finally property cat reinsurance underwriters, under increasingly hands-on central management, are also moving capacity away from areas that have caused the most pain, including aggregate structures and lower layers that have again been decimated by frequency losses in 2021.
As we now know, this retrenchment was a key driver of the 1 January property renewal, and also shaped behaviour in other lines such as casualty where reinsurers are keen to deploy capacity instead due to improving margins.
The numbers reported by brokers in their renewal post-mortems this week speak for themselves.
Guy Carpenter’s global property cat rate-on-line index increased to 10.8 percent. This marked the biggest rise since 2006 and took pricing back to 2014 levels.
At the loss-affected regional level, rate increases have been dramatically higher, with some insurers in Germany, for example, paying more than 50 percent more for cover after ceding heavy losses from last summer’s European floods, according to Gallagher Re data.
In the US meaningful increases were also seen for those impacted by the litany of largely unmodelled 2021 cat losses (such as Uri, Ida in the Northeast and convective storms including the December tornado outbreak late in the renewal process).
By historical standards, the increases now being seen for property cat in direct and reinsurance business are substantial, especially in Europe.
But are they enough?
Are the levels of increase enough to restore margins if 2022 looks like 2021, with $100bn+ of global cat losses?
For those underwriters that are routinely talking about the impact of climate change and a new level of risk, especially relating to so-called secondary perils, the answer is probably no.
The models are not yet showing the impact of climate change, largely because it is not known.
That means some underwriters at insurers and reinsurers are making the case that a greater weight needs to be put on recent experience rather than modelled output and longer-term historic trends.
There is already anecdotal evidence that some reinsurers will become even more discerning and cautious in the deployment of their capacity in 2022, which could have a particularly troubling impact on buyers in Florida, where retrenchment has been a theme of the last few years.
Some sources have said they wouldn’t be surprised if a number of traditionally active Florida reinsurers limit their participation this year to only the highest performing companies and state-backed Citizens.
Add the potential impact of increased capital charges from S&P for cat risk and traditional reinsurers are unlikely to be changing their tune any time soon.
Are the levels of increase enough to restore margins if 2022 looks like 2021, with $100bn+ of global cat losses?
Then there is the question of how much appetite ILS investors will have this year to continue supporting collateralised reinsurance (and retro).
There has been a clear shift in appetite away from this segment and towards more remote cat bond risk, where investor demand to participate is strong, leading to softening pricing on issues in what proved to be a record year for the asset class.
But what happens if 2022 is more like the period that preceded the recent run of heavy cat years?
Will the talk of a new view of risk hold any weight if this year runs its course with a below-average catastrophe toll and a set of less events that fit more closely to modelled scenarios?
The next litmus test for reinsurer resolve will be the 1 April Japanese renewal. After significant consecutive rate increases at recent renewals in response to typhoon losses it seems unlikely the big three will bend to pressure for another round of rises after a year when they have spared their reinsurers…
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