Years of above-average insured cat losses has led to an environment of increased capital deployments towards property cat reinsurance because of increased pricing, says Moody’s in a new note.
The agency said that reinsurers have so far this year boosted probably maximum loss (PML) exposures as higher pricing has drawn more capital to property catastrophe risk. At the same time, a divergence between US/Bermuda reinsurers and their European peers has continued, says Moody’s. All this, the firm said, points to a strong upcoming renewals season.
It added: “The upcoming April renewals in Japan and the June/July renewals in Florida will provide further details on 2022 pricing trends and reinsurers’ catastrophe risk exposure profiles. Property catastrophe reinsurance pricing is likely to rise further: weak sector profitability in recent years from above average catastrophe losses, inflationary pressures, a focus on the impact of climate change on catastrophe event frequency, strong demand from ceding companies and tight supply conditions in the collateralized retrocessional market all point to higher pricing in the months ahead.”
Moody’s said that the declining trend in PML exposures as a percentage of equity capital largely ended in 2018 as catastrophe reinsurance pricing moved higher following the record level of insured catastrophe losses in 2017.
It went on: “The upward trend in pricing remains intact, driven by above-average catastrophe losses in four of the past five years that have hurt profitability in the sector. Reinsurers are taking advantage of improving expected returns by increasing their exposure to property catastrophe reinsurance business.”
Meanwhile, it said that the large European reinsurers continue to deploy increasing amounts of capital to property catastrophe risk as pricing has improved, while the US/Bermuda firms have taken a more measured approach in recent years.
“In the most capital-intensive risk zone, US wind,” Moody’s wrote, “the large European reinsurers reported a significant increase, while US/Bermuda firms were roughly flat overall, with reductions at AXIS Capital and Everest Re offsetting increases at Lancashire Group and PartnerRe. Since 2011, there has been a general trend of US/Bermuda companies cutting back on their US wind exposure as a percentage of capital, while the large European firms have increased them.”
It added: “This overall declining risk profile among most US and Bermuda reinsurers results from a number of factors, some of which are firm specific. In particular, Arch Capital has significantly reduced its natural catastrophe PMLs in recent years as its exposure to mortgage credit risk has grown. Other firms, such as Everest Re and AXIS Capital, have made the decision to significantly shrink their net catastrophe exposures to reduce earnings volatility, through both reduced direct exposures, as well as the increased use of retrocessional reinsurance, some of which is sourced from affiliated sidecar vehicles.”
European reinsurers, in contrast, have continued to deploy increasing amounts of capital to catastrophe risk as pricing has gone higher. These firms, said Moody’s, have had an ability to increase capital allocations to cat risk through their larger scale and geographic and product diversification.
