A new note from Berenberg says that rates remain under pressure while natural catastrophes for this year are poised to hit $100bn.
The firm pointed to a press released put out by reinsurance giant Munich Re. It said Munich Re stressed that rates need to rise for a number of reasons.
Berenberg wrote: “We believe that the uncertainty created by the combination of inflation and high nat-cat losses means that reinsurers need a much bigger risk margin in order to be persuaded to put their capital at risk. Munich is clearly expecting a step-change in pricing. We believe rates will rise by c10%, and this is strongly positive.”
It added: “The reason we believe Munich is insisting on a significant rise in pricing is the recent experience of natural catastrophes: […] nat-cat claims now recur at a high annual level, which is like a new plateau; by contrast, until 2016, there had been volatility both up and down in annual nat-cat claims, with many periods of below-average claims. Until 2016, pricing could be guided by the concept of payback, which refers to the number of years of premiums needed to cover a loss, and we believe that since 2017, payback would have been indicative to pricing levels that are too low to cover global nat-cat losses.”
Elsewhere, Berenberg laid out the case for losses arising from Hurricane Ian to hit $50bn. It estimated that $45bn of that was related to Florida, with property premiums in that state at $30bn.
It added: “Deducting expenses at 25%, this leaves $22.5bn to cover claims, leaving a shortfall for 2022 just from Hurricane Ian of $22.5bn. We assume premiums rise by 50% (10% for extent of cover, 40% for pricing) so that in 2023 there are $33bn of premiums available to pay for claims. This would clearly more than cover the $22.5bn Hurricane Ian shortfall; we estimate the payback would be 1.7 years and this is very attractive.”
It went on: “However, our calculation of payback assumes that 2023 is loss-free, and whereas Florida may have a loss-free year, the high number of global natural catastrophes since 2017 means that the global reinsurance industry cannot rely on the assumption that there will be a surplus from the 2023 premiums to pay for the 2022 Hurricane Ian loss.”
Berenberg finished its note by reflecting on comments made by Swiss Re in recent days at the Baden-Baden conference in Germany. It said that Swiss Re had told people that it expects European cedants to seek ‘significantly more’ catastrophe capacity at the January reinsurance renewals, but that a reduction in cat appetite and inflationary pressures would push rates higher.
Berenberg wrote: “Swiss Re’s Head of Northern, Central and Eastern Europe, Frank Reichelt, said he expected cedants to demand up to €2.5bn of additional cat capacity to cover their risks in Germany alone. He added that the main drivers of this increased demand are inflation, which is pushing up the valuations of insurer portfolios, and the increasing loss trends from secondary perils and the cost of retrocession and availability of retro cover.”
