Reinsurance News

Great opportunity for property CAT investment amid “perfect storm”: Carson K2 CAT

31st January 2023 - Author: Kassandra Jimenez-Sanchez

A “perfect storm” has created a hard market for property treaty business, the best underwriting conditions in the last 30 years. The higher rates stemming from a challenging economic environment have made this a great time for investors to enter the market, said David Carson, head underwriter at MGA K2 CAT.

The overarching theme during these January 2023 renewals has been significant rate increases with all regions, globally facing a hard market.

This has been driven mainly by supply and demand dislocation, stimulated by sharp increases in inflation; consecutive years of large Nat CAT losses, further exacerbated by Hurricane Ian; and low capital coming into the segment as investors are wary of losses.

It is with this background that Carson shared his views on the market with Reinsurance News. As a seasoned underwriter with over 35 years of experience he knows this will be a challenging period for reinsurance but remains positive and excited to see what this environment will bring to the business.

“I’m old enough to remember 1993 and it was definitely the hardest market I’ve underwritten in … until now. It was just immediately after Hurricane Andrew in August 1992, which was at the time, one of the biggest losses the industry had to deal with,” said Carson.

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“We’ve had tough markets since then, after World Trade Center and after Katrina for example. But this 2022-23 is definitely the hardest market I’ve ever worked in.”

“The US market has gone through a period of heightened loss activity. Nearly 40% of all cat losses since 1992 have been in the last five years. The US market is supposed to be the best priced segment of the global catastrophe reinsurance market, generating superior returns, and clearly something had to change,” he noted.

“Both reinsurers and investors have reacted to the situation where you’ve got losses and capital erosion, with some reinsurers retrenching and some withdrawing completely. Additionally, investor sentiment is generally negative, everyone is very fearful of CAT business, and they don’t really want to invest in it until there’s proof that a proper “re-alignment” has occurred.

“All of these factors have come together, and the result is a very tough market for people buying reinsurance. It’s been great from an underwriting point of view.. Of course, we’re an MGA and we never have enough capacity, we always want more capacity to be able to service our clients.”

According to Carson, the average risk-adjusted rate change on most of the businesses K2 CAT wrote at 1st January, is 60% to 75% more than last year. That means that the premium spend is even higher, and in most cases almost double what they were paying in 2022, and that’s with companies that have not had losses, he added.

As the January renewals have come to an end, and with the April renewals coming next, Japan’s outlook does not seem as dramatic as the US’, Carson stated.

He said: “The outlook for Japan is that reinsurers need to be, as they do in every territory, paid a price that’s commensurate with the risk they’re taking. So, we would expect some pretty significant rate increases in Japan as well.

“I don’t know what the number will be, I think it’s too early to say and difficult to generalise, but it won’t be as dramatic as the US. For example, on wind/flood business in Japan, rates still need to increase pretty significantly.

“Earthquake is more stable. Earthquake rates increased significantly in 2011 and 2012 after the Tohoku tsunami and seaquake. But it’s the typhoon rates in Japan that need to increase a lot.”

Rates are increasing everywhere, and no territory is immune. This has been the result of high demand and not enough capital entering the market, especially the CAT market, geopolitical events; inflation; and higher interest rates leading to investment losses, according to Carson.

“Rates are increasing in all territories, and if you’re trying to attract investors, like we are as an MGA, you need to be able to prove that you can make money. If you keep on losing money, like the US has, it’s not a surprise that suddenly rates are going up so significantly.

“This is a situation where there’s a lot of reinsurers who are cutting back on property CAT because they’re worried about the volatility, and they’ve had bad loss experience.

“At the same time, there is increased demand from insurance companies all around the world. For example, if you look at the US, people were talking about maybe $20 billion of extra limit required or up to $50 billion,” he explained.

“Ultimately,” said Carson, “there’s a lot of demand and not enough supply, so there’s a need to get more investors into the market.

“And how are you going to get investors into the market if the product doesn’t make any money? We have to make sure that we are charging a price that is commensurate with the risk. And because of this, we’re seeing a significant reaction around the world.

“There’s less available capital for the reinsurance market. According to reports, it has decreased by anywhere between 10% and 15%. I think the ILS market – which of course is a relatively new phenomenon, but it has been present for the last fifteen years – has had a lot of issues with the mechanics of their products in terms of trapped collateral, they can’t reload as easily as before, therefore, their capacity has reduced,” he said.

“I believe that this time, there’s far more fear and scepticism about capacity than I can remember from the past,” he continued. “In past years, after big events like Hurricane Andrew in 1992 or World Trade Center in 2001 or Katrina in 2005, you saw an influx of new capital/new reinsurers being capitalised and formed and coming into the market to take advantage of the good conditions.

“You’re not seeing that at the moment; that’s not happening. It may happen in the future if this momentum carries on, which I think it will do for at least a couple of years. There is also this inflationary environment and all these geopolitical issues going on with Ukraine at the same time, plus climate change. And that exacerbates the situation.

“I think that all these factors have come together and created a perfect storm.”

Despite this challenging economic environment, he remains positive and believes that this is actually a great time and opportunity for investors looking for diversified assets (such as reinsurance) to get into the CAT market.

“I hope that now that we’ve had the January 1st renewals, some investors look at the market and see that reinsurers really meant what they said and rates did indeed go up substantially, together with higher retentions and more restricted coverage. And as a result, I believe that we will see more capital coming into the market. There is a lot of really good business out there, which is now paying a lot more money than it ever did before.

“I believe that people can now see that this is a remarkable opportunity to write CAT business and they just have to make sure that they’re comfortable with the volatility because that is the nature of CAT business.

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