According to a report from analysts at Peel Hunt, a potential capacity crunch in the reinsurance sector could be one of the key catalysts for further property catastrophe rate rises at the January 2023 renewals.
The report suggests that despite the fact the solvency capital position across the reinsurance sector is healthy and the reinsurance industry is well capitalised, five years of earnings volatility and sub-par returns on capital have led to modest incremental investment into the reinsurance sector at present by traditional or alternative (ILS) capital.
Peel Hunt’s analysts add that existing dedicated capital may not be enough to match the higher demand for reinsurance cover that is likely to emerge from insurance cedents at year-end.
The increased demand for reinsurance cover from insurers is chiefly driven by inflation increasing risk exposures, and the reduction in reinsurance capacity available to cover frequency risk, says the report.
The analysts note, “There is anecdotal evidence that the limit (exposure) being placed in the US property catastrophe market is $200bn.”
“At 10% inflation, there will be $20bn additional demand for limit which is unlikely to be available as reinsurers increase attachment points by actively reducing exposure to the lower working layers of property catastrophe programs and seek to improve returns on capital of the capacity they do put to work.”
The report adds that there is more capital being put to work in the reinsurance market, but it is diversifying and moving into non-catastrophe classes to access the better ground-up primary rates.
Peel Hunt says that reinsurers are suggesting cedents may need to retain more risk on their balance sheets as attachment points increase with inflation; to which a more cautious underwriting approach by reinsurers is likely to be added.
Its analysts wrote, “Whatever incremental reinsurance capacity is available will be put to work at significantly higher rates with reinsurers increasingly conscious that rate adequacy has not uniformly been achieved in property catastrophe classes, and they have to deliver better returns to investors in order to maintain capital flexibility.”
The report expects high-single to low-double digit rate increases at the upcoming renewals as the reinsurance market continues to grind higher.
It affirmed that a benign US Hurricane season could lead to rate increases at the lower end of its range, adding that in an active Hurricane season, reinsurers’ exposures to property catastrophe could be trimmed further which will deliver rate increases at the top end of its range.