Following the major catastrophe losses of recent months in the United States, Caribbean and Mexico, primary insurance carriers may be inclined to use an increased amount of reinsurance to manage their exposures.
Fitch ratings believes that an increased demand for catastrophe and property reinsurance protection could be one of the outcomes of the recent industry loss experience, with carriers likely to take advantage of the ongoing abundance of reinsurance capacity.
Fitch notes that, while severe, the losses only constitute around a 1 in 10 to 20-year loss event, which shows that it could have been worse.
Carriers are also likely looking at loss estimates for hurricanes Harvey, Irma and Maria and noticing little movement and in some cases a decline, so may be feeling that they have escaped what could have been a much more significant impact to their capital this year.
As a result, “Primary underwriters will be more inclined to spend more on reinsurance protection,” Fitch Ratings explained in a new report.
Fitch expects to see primary writers, “Utilizing aggregate catastrophe reinsurance rather than per occurrence treaties, and also utilize more per risk and facultative cover to manage net retentions,” as they seek to manage their exposures.
This could all be part of carriers desire to, “Utilize knowledge gained from 2017 to modify property underwriting and risk aggregation practices.”
Which could help to boost demand at the next sets of reinsurance renewals and provide reinsurers with an opportunity to write more business at the higher pricing levels which are anticipated.
Potentially offsetting the opportunity for reinsurers is the fact that there is not expected to be any scarcity of capacity, as, “Reinsurance market capacity is anticipated to remain strong in the near term,” Fitch explained.
This could mean that the opportunity to take advantage of price rises is more urgent, as the weight of capacity may mean a steady decline in pricing begins again before too many renewal seasons are passed.
There is also a chance that reinsurance carriers look to use more retrocession as well, which could also increase demand for that end of the market.
With demand perhaps set to rise, that could squeeze the availability of reinsurance capital you might think, but Fitch does not expect the overall dynamic to change much in the near-term.
Managing director James Auden said, “Recent large losses will lead to higher commercial property and homeowners premium rates in markets most adversely affected by the recent storms and wildfires. But while other underperforming segments may see flatter price changes relative to recent rate declines, any improvement may ultimately be short-lived as competitive dynamics are relatively unchanged.”