According to analysts at Peel Hunt, reinsurance underwriters are increasingly re-examining the adequacy of property catastrophe rates as the rising frequency and severity of catastrophe losses continues to test the accuracy of existing models.
Whilst US property catastrophe rates are delivering better margins, Peel Hunt says that re/insurers are becoming “less confident” in rate adequacy as climate change begins to create uncertainty around catastrophe risk exposures.
Following Peel Hunt’s Lloyd’s Insurers Tour, the market sentiment still seems to be that reinsurance is a hardening market and not yet a hard market, with further rate increases considered necessary to improve margins and absorb rising property catastrophe risks.
Meanwhile, the Corporation of Lloyd’s, which oversees the London specialty insurance market, has indicated it would remain focused on enforcing underwriting discipline and it will only be next year that the market may grow exposures again.
Confidence in rate adequacy has been shaken following another active summer for cat losses, which include Hurricane Ida, wildfires and flood losses in Europe, and which come on the back of freak winter events that saw freezing conditions impact Texas and other US states.
Peel Hunt notes that there is also a changing mix within the property catastrophe books, with reinsurers increasing the point at which coverage attaches in order to lower their exposure to the rising frequency of secondary perils.
In response, reinsurers continue to diversify into non-cat reinsurance classes and write more quota share treaties that give exposure to the specialty insurance market where risks are better priced.
“As the renewal season kicks off, talk of rate reductions are ‘out of the window’ with initial expectation of 0-5% rate increases now coming in at the top end of this range,” Peel Hunt commented.
“On the question whether reinsurers are getting paid enough to absorb property catastrophe risk the answer was often ‘no, not enough’ but there is a recognition that one cannot escape the supply – demand cycle of the reinsurance market and the presence of ILS capital,” it added.
“As the renewal season unfolds, it is clear that despite reinsurance rates having recovered from their 2017 lows there is not enough margin in pricing to absorb rising property catastrophe risk and earnings volatility; it is more likely than not that rates will continue to rise next year.”
