Rate rises in property cat reinsurance to ease in 2024: Peel Hunt

The pace of rate rises in the property catastrophe reinsurance market is likely to ease in 2024, following the rate adequacy achieved now that hard market conditions have developed in 2023; yet it is likely to take a number of years before this market starts to soften again, Peel Hunt highlighted following discussions in Monte Carlo.

“In our view, the returns on capital currently being generated are starting to become attractive on a risk-adjusted (modelled) basis, but this still needs to be proven,” analysts added.

Focusing on excess of loss treaties (XL) that dominate the property cat reinsurance landscape, Peel Hunt analysts noted that the tightening of Terms & Conditions appears “here to stay, as there has been a structural shift in the reinsurance industry’s risk appetite.”

They added: “The increase in attachment points as reinsurers move away from providing earnings protection (ie covering frequency risk) to insurance cedents is only likely to be eased ‘at a price’.

“Some reinsurers and brokers are suggesting there is ample capital that is providing severity cover, as reinsurers have crowded the top layers of catastrophe reinsurance programs, and hence that the scope for further rate increases is more modest at present.

“Rate support should driven by an ongoing increase in demand for property catastrophe reinsurance cover, as insurers catch up with latent demand following a disrupted 2023 renewal season and ongoing elevated claims inflation expectations. As such, rate adequacy should be maintained going into the 2024 renewal season.”

In its comments, Peel Hunt highlighted that rate adequacy still needs to be fully tested before there is any scope for rates to soften again.

Analysts said: “There is some emerging evidence that reinsurers have reduced their exposure to frequency risk (or secondary perils), such as wildfires and convective storms, which have accounted for just under 60% of insured catastrophe losses in the past decade.

“Reinsurers have not been as impacted by the elevated frequency of medium-sized 1H23 catastrophes in the US, with primary insurers having absorbed the brunt of these secondary peril losses. This has allowed reinsurers to generate high-teen annualised returns on equity during 1H.”

Moreover, rate adequacy has not been tested for severity yet, but as we enter the peak months of the US hurricane season, this is likely to happen, analysts noted.

They also question if the surge in Catastrophe Bond issuance by reinsurers to investors – replacing a receding and expensive Retro market – has transferred sufficient ‘tail risk’ that will help cap severity risk for the industry.

They said: “Ideally, the reinsurance sector would need to prove it is operating within a band of catastrophe risk exposure (away from frequency risk and capping severity) that fully remunerates investors for taking on property catastrophe volatility.”
Additionally, Peel Hunt noted that the US specialty insurance (rather than reinsurance) classes, is an area of significant growth opportunity. In specialty insurance there is further scope for rate hardening in US property classes.

“As US primary insurers retreat from providing cover for catastrophe exposed property insurance, there is a spill-over of demand for capacity from the US admitted to the US Excess & Surplus market. This is an area where the Lloyd’s market has a significant market share (17%),” said analysts.

Concluding: “Rate adequacy has not yet been achieved in catastrophe-exposed property insurance, in part due to the lower protection provided by the reinsurers. As such, specialty insurers are gearing up for an increase in demand for cover, and further rate hardening is expected (from a base of c. 25% in 2023).”

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