Although small capital raises are happening in the reinsurance market, providers remain guarded about putting funds to work in the property catastrophe space, suggesting there’s more pain to come, according to Chris Bonard, CEO of Ardonagh’s Bermuda business operations including Inver Re.
“The situation is getting worse, and could have a big impact on the market, potentially leaving thousands of property owners without viable cover options,” Bonard told Reinsurance News when asked about the trend of re/insurers cutting exposure to parts of the property catastrophe sector, in a recent interview.
He explained that while everyone is heavily focused on the reinsurance buying of property cat, if you pay attention to the amount of third-party MGAs and how much capacity on property cat is held by them under binding authorities in the U.S. and London markets, it’s a real issue.
“This ultimately feeds into the reinsurance market, and when you see Farmers’ latest move, for instance, it’s not a surprise. It’s likely we’ll see a domino effect of similar caps and caution from others, too,” said Bonard.
In early July, Farmers Insurance became the latest in a growing number of primary insurers to cap new homeowners’ policies in California, citing severe weather events, inflation, and mounting reconstruction costs.
U.S. primary insurance giant State Farm also announced plans to cease underwriting commercial and residential property in the state, which followed a similar move by Allstate in 2022.
Of course, the issue extends further than just California, with Florida also experiencing cutbacks from both primary insurers and traditional reinsurers, again driven by the elevated loss experience and inflationary impacts.
Currently, reinsurance broker Inver Re is “actively in capital raising mode,” explained Bonard, but the reality is that, at the moment, “capital is very, very guarded about putting money to work on the balance sheet for property cat.”
“The real issue is they just haven’t made any money. People look at the market and they all understand the rate index, they understand that portfolios are better – but a lot of them are just asking themselves, ‘Why would I take that to my investment committee right now?’,” said Bonard.
“We are seeing little raises, but if you look at the global capital index there’s still less capital today than there was, and it is definitely not coming into property cat,” he added.
At some point, stressed Bonard, things will change, but market dynamics mean that you’re going to see a very hard property market.
“We see it on our insurance side. The team is very seasoned, and our insurance property brokers feel it is as hard now as it was 1993,” said Bonard.
What’s more, Bonard doesn’t see any signs of a white knight entering the market to alleviate the pressure.
“Even if you did see a couple of white knights ride to the rescue and decide to write the market for the next couple of years, it’s not sustainable. And then when you look at the MGA space, I think there’s definitely a lot more pain to come,” he said.
Adding: “There are so many variables currently at play. Whether it’s hyperinflation, war in Eastern Europe, or global warming. There’s a lot of things going on and the insurance industry has got to change and adapt how it looks at today’s risks. As a result of that, I think we’re seeing some quite interesting things.”
One example of this from the challenging and changing market environment, according to Bonard, is that it’s fuelled greater interest in things like self-insurance and parametrics, the latter being an area in which Inver Re has expanded its expertise in recent times.
“We’ve made a big investment on parametrics. The interest we are seeing on that today is quite remarkable compared to the last decade. People are taking it seriously now, and I think it’s a combination of a number of factors.
“Part of it is people just getting more used to basis risk exposure, which let’s be honest, they’ve got more used to with ILWs and ILS. So, it’s been evolving over the last ten years or so. And the hard market means people get even more comfortable with basis point risk.
“Plus the products, providing risk/return works for the carrier and the capital really works for the buyer, so they’re more cost effective ways of addressing some problems,” said Bonard.
“Ultimately insurance has to evolve with the environment, and we’re right at that point of change. As well as pain, there’s also plenty of opportunity.”
