After conducting a virtual tour of Bermuda, analysts at Keefe, Bruyette & Woods are expecting a satisfactory, albeit unspectacular 1/1 renewal.
Although all of the executives KBW analysts met still expect property reinsurance rate increases during the pending renewals, current rate increase have been described as ambitions and are seen as modestly below levels hoped for several months ago.
KBW says this modest deceleration was attributed to significant capital inflows and the fact January 1 cedents typically comprise European and national domestic carriers; Europe hasn’t sustained major catastrophe losses recently, and bigger domestic carriers are very well-capitalised.
With some variation, management teams anticipate European property catastrophe rate increases of up to 5%, U.S. property catastrophe rate increases ranging from upper single digits to up 15%, and retro rate increases of 15-20%.
Overall, the market still looks positive; current rate increases compound past years, and terms and conditions – ranging from silent cyber to pandemic-related exclusions – are tightening.
Although property catastrophe-related January 1 reinsurance rate increases appear modestly below elevated expectations, analysts note how casualty rate increases – especially for US casualty lines – remain very robust, with several executives citing 100-200% rate increases (presumably more of an upper bound than an average).
The companies KBW met were consistently optimistic that these rate increases will persist, since the underlying catalysts (previous years’ rate decreases, worsening social inflation, and low interest rates) themselves appear long-lived.
Meanwhile, many reinsurers are shifting their casualty focus to quota share coverage to “automatically” capture the upside of significant primary casualty rate increases; associated ceding commission changes reportedly depend on individual cedents’ profitability, coloured somewhat by broad skepticism over reserve adequacy for accident-years 2016-2018.
Unlike past hard markets that included material capacity shortfalls, there currently seems to be enough capacity for almost all risks, as long as the pricing is seen as adequate.
Analysts state that catastrophe bond issuance is setting records, which is probably a factor moderating catastrophe reinsurance rate increases, and some retro buyers are also prepared to buy less coverage.
More positively, the executives KBW met noted that newly formed and newly capitalised re/insurers (not all of which will have fully built out their operating infrastructures in time for the January 1 renewals) are maintaining the broader industry’s price discipline.
Significantly improving expected returns for business written in 2021 and 2022 is driving significant interest in transferring legacy reserves to run-off specialists, in the hope of liberating capital.