Analysts at KBW have reported that secondary perils that had previously been reinsured are now being “aggressively pushed back” toward primary insurers ahead of the January 1st reinsurance renewals.
KBW provided some comments on the state of the global reinsurance market heading in to the critical renewal period, after meeting with companies in Bermuda.
The main takeaway was that reinsurance renewal contract signings for January 1 are running “very late,” with only about 5% of the treaty market having reportedly cleared so far, versus the typical 60% for this point.
According to KBW, this reflects that fact that cedants have simply been unprepared for the level of sustained discipline shown by reinsurers, and the lack of available capacity.
Retrocessional reinsurance renewals are also reportedly late, and past years’ tendency for retro deal signings to follow broader reinsurance renewals is reversing itself, with trapped or lost capital in the ILS space also creating significant capacity shortfalls.
One of the results of these issues is that reinsurers are refusing to take on many secondary perils they previously would have covered, amid a severe tightening of policy terms and conditions.
Tightened areas include a specific focus on covering only individually named perils such as hurricane and earthquake, KBW reports, as well as granular exclusions of individual regions and risks.
And unlike previous years, reinsurance programs should frequently include non-concurrent pricing and policy terms and conditions, which will probably materially complicate the primary insurers’ assessments of their net exposures.
Another ramification of the very wide gap between the demand and supply of available reinsurance capacity is rising reinsurance attachment points.
KBW notes that cedents should retain much more exposure to lower layers.) that they can no longer reinsure, often from secondary perils like convective storms, wildfires, floods. This implies more retained earnings volatility than in recent years, and KBW consequently expects re-accelerating primary property insurance rate increases to pay for higher reinsurance costs and absorb higher retained volatility.
All of these factors mean estimates for overall average reinsurance rate changes vary widely, but do reinforces the expectation of a dramatically-improved operating environment for reinsurers in 2023, including very significant risk-adjusted rate increases and substantially tighter terms and conditions.
Executives’ estimates for traditional US property catastrophe reinsurance rate increases ranged from +30-55% to +60-80%, based on KBW’s recent meetings with Bermuda firms, with industry loss warranty (ILW) pricing up 100% or more, and smaller increases likely in Europe.
“The overall sense in Bermuda is that passing time further strengthens the reinsurers’ resolve, keeping them confident that capacity deployment opportunities will persist straight through to – and almost certainly beyond – January 1,” KBW concluded.
