With the property hard market firmly intact, the upcoming January 1st renewal is set to be much more orderly than last year, said JMP Securities analysts as they share their comments following the RVS 2023 in Monte Carlo.
“Overall, we see the upcoming renewal as being highly orderly, with price movements modest and terms/conditions (particularly retentions) largely holding,” analysts stated.
Adding: “This is the result of continued elevated catastrophe activity for the sector (albeit with the burden shifting away from reinsurers to the primaries), alongside a marginal amount of new capital being injected into the sector (it is worth noting the sector doesn’t need more capital, unlike in prior cycles).
“Of course, this relative stability is predicated on there being no major land-falling hurricane (or other exogenous event) producing sizable insured losses before year-end (as was the case with Hurricane Ian last year), in which case all bets may be off.”
As the 1:1 renewals are predicted to be orderly, JMP Securities sees pricing flat to slightly up. Across their meeting in Monte Carlo, analysts’ takeaway on pricing was that all sides appear to be “in relative agreement on the likely outcome.”
They noted: “Reinsurers are pushing for further rate increases – at least enough to keep pace with inflation – but will be quick to note that they care more about terms and conditions than pricing, within reason.”
“Brokers/insurers acknowledged that it will likely be difficult to get pricing to come down and that flat would be viewed as a victory. We expect particular focus around increased top-layer protection as cedants react to inflation, as well as an upcoming new RMS Atlantic hurricane model.”
JMP Securities highlighted: “The one comment we heard that summed up all you need to know was that while reinsurers historically picked up the tab in Monte Carlo, this year insurers were highlighting just how much they need their reinsurance partners and are trying to remain in their good graces.”
Another takeaway from JMP Securities talks in Monte Carlo, was the focus that remains on secondary perils and the fact tha reinsurers are unlikely to give up any ground on increased retentions.
Analysts explained: “While the first half of 2023 remained highly active from a catastrophe loss perspective – well on track to surpass $100 bn for yet another year – reinsurers are feeling much better about this year’s results thus far. This is because the significant changes in terms and conditions at recent renewals – most notably much higher retentions for cedants – have had the intended impact.
“The overwhelming majority of catastrophe activity YTD has been from a high frequency of smaller events – mostly SCS, or severe convective storms – which with increased retentions and an absence of aggregate covers means primary insurers were left retaining the majority of the losses. In its simplest form, reinsurers have gone from protecting cedants’ earnings (frequency/volatility) to protecting cedants’ capital (severity).”
At the same time, across all their meetings, JMP Securities’ analysts heard little-to-no appetite from reinsurers to reverse course at the upcoming 1:1 renewal.
According to the firm, most reinsurers said they plan to hold a firm line, while some said they plan to push for further increases. A small number suggested they might be willing to return to lower down exposures, but only on a case-by-case basis and that the price must be right.
Appetite for aggregate covers seemed similarly weak, analysts added, although for the right price or terms, some may be willing to revisit the structures.
Finally, they also noted that even though some new entrants are trying to raise capital, capital shortage is not driving this cycle turn.
JMP Securities said: While we do not believe there will be a “Class of 2024”, there was a lot of talk in Monte Carlo about a small number of new start-ups currently in the market trying to raise capital. As we see it, unlike in prior cycles the industry is not in need of new capital, thus the new formations are not fulfilling a need in the market.
“Likewise, the amount of capital trying to be raised is quite small (low/mid-single-digit blns), particularly compared to the amount of capital already in the industry (est. $560 bln at year-end 2023, per Guy Carpenter) or the amount that is likely to be generated on an annual basis during hard market years (we suggest strong double-digit ROEs on the aforementioned capital base).”
