Analysts at Fitch Ratings have argued that reinsurance rates will continue to harden during the January 2023 renewals, even in the absence of significant catastrophe losses throughout the second half of the year.
In a new report, the rating agency notes that, at $34 billion, H1 worldwide insured natural catastrophe losses were manageable for the insurance and reinsurance industry this year, and well below the $47 billion level recorded for the same period in 2021.
Nevertheless, the June-July 2022 renewals represented the tightest pricing conditions since the devastating 2004-2005 US hurricane seasons, with many reinsurers reduced catastrophe risk capacity, particularly at lower layers and for aggregate XOL treaties.
Other reinsurers expanded catastrophe business, but remain specifically underweight in Florida given concerns in the dysfunctional market, despite up to 50% rate increases attained at the recent renewal for Florida property loss hit business.
Instead of large catastrophe losses, Fitch explains that pricing momentum has instead been driven by the continuing supply/demand imbalance as reinsurers hold firm to maintaining discipline in both pricing and terms and conditions, even with higher interest rates.
Thus, analysts believe that the market will continue to harden through 2023 regardless of the level of catastrophe activity experienced during the remainder of the year.
Fitch believes that reinsurance capacity will be selectively constrained at 1/1 from reduced property catastrophe risk appetite, with business generally shifted to less volatile casualty and specialty lines.
However, it also says that reinsurance demand will remain strong as primary insurers contend with increased risk and higher inflation drives higher total insured values.
Pricing momentum this year has also influenced by uncertainties around ultimate rate adequacy given persistent heightened catastrophe losses, potential losses from the Russia-Ukraine war and deteriorating loss-cost trends with high core economic and social inflation.
And reduced retrocession capacity at increased rates is anticipated at next year’s renewals as collateralised quota-share reinsurance and sidecar vehicles retreat from the market following several years of above-average catastrophe losses and trapped capital.