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Will 2023 reinsurance renewals mark a turning point to a “true hard market” that attracts “new capital in droves” and expands supply?

Analysts from AM Best raised the question in a new Best’s Market Segment Report published Wednesday, titled “Market Segment Outlook: Global Reinsurance.” While citing a complicated array of positive and negative impacts on the reinsurance market that make predictions uncertain, for now, they said they expect only a handful to be attracted by the prospects of continuing price hikes.

“Given the elevated catastrophe activity experienced this year, asset market volatility, continued geopolitical angst, inflationary pressures and recession fears, uncertainty could remain so high that few investors will feel comfortable deploying capital regardless of the price,” the report says. “A few new entrants will still try, but their impact is likely to be limited in a market in which rates could continue to rise in response to more limited dedicated capacity.”

The report says the same negative factors—heightened natural catastrophe activity, volatile investment markets, inflation pressures and recession fears—are counterbalanced by enough positives to allow the rating agency to maintain a stable outlook on the global reinsurance segment. Among the positives are rising prices and market discipline, higher demand for reinsurance from primary carriers looking to stabilize results, and moves by some reinsurers to diversity business mixes and reduce property-catastrophe exposures.

The report highlights the ideas that Hurricane Ian is not the only property-catastrophe event that has new capital sitting on the sidelines and ILS investors remaining cautious, and also notes that Florida is not the only region in need of price jumps.

In addition to traditional natural catastrophes, the growth of secondary perils has pressured reinsurance earnings, the report says.

Separately, on Wednesday, both AM Best and Gallagher Re published reports about insurer and reinsurer nine-month financial results, shedding light on catastrophe loss impacts for the last two years. While AM Best tallied statutory numbers for U.S. property/casualty industry and Gallagher Re compiled company earnings reports for 26 large global insurers and reinsurers, both analyses reported a higher catastrophe loss impact for the first nine months of 2021 (8.2 points) than the first nine months of 2022 (7.0 points per AM Best and 7.6 points per Gallagher Re), which includes the Ian losses.

In the reinsurance outlook report, AM Best noted the compounding impacts of natural catastrophe losses, economic and geopolitical uncertainty on reinsurer results, stating that even though the reinsurance sector remains well capitalized, “the instability of financial results and inability of most players to meet their cost of capital has tested investors’ risk tolerance,” particularly in ILS markets.

Putting aside Ian—”one of the costliest events in recent history”—the accumulation of small and medium-sized events has materially impacted loss ratios, with events occurring not only at unexpected times of the year (as was the case with Winter Storm Uri in 2021 in Texas) but also in unexpected places (Hurricane Ida affected Canada in 2021).

“Pricing continues to improve—but is it enough?” says a subheading of the report, going on to offer these observations:

  • “Florida’s pricing movements may not necessarily be a good indicator of what’s expected for other cat-exposed territories in the next renewal cycle.” The report notes that price improvements in Europe, for example, have been more modest, despite the unexpected impact of last year’s Bernd floods last year and recent hailstorms in France.
  • “No one questions the improvement in global reinsurance rates since 2018 [but] reinsurers [generally], particularly property-cat writers—have been lagging primary carriers and retro providers.”
  • The pace of property-cat price hardening is picking up, as evidenced by a 15 percent jump in the U.S. Property Catastrophe Rate-on-Line Index calculated by Guy Carpenter between January and July 2022.
  • “Such an increase has not been seen since 2006 and is leading to speculation that the end-of-year renewals may witness a ‘true’ hardening that eventually turns the corner for reinsurers.”
  • “The big question [is] the potential impact that inflation…may have on ultimate claims.”

Separately, during a conference presented by another rating agency last week, the Fitch Ratings 2022 North American Insurance conference, an executive speaking the P/C industry’s vulnerability to claims volatility contrasted that last period of hard pricing in 2006 with the current one and called attention to the relative weakness of catastrophe models in understanding secondary perils compared to major perils of hurricane and earthquake.

S&P has a negative outlook on the global reinsurance sector. See related article: Still Negative: S&P Isn’t Budging on Reinsurance Outlook

Fitch Ratings announced that it would maintain a neutral fundamental rating outlook for the global reinsurance sector in September.

Mark James, executive vice president and chief risk and reinsurance officer for CNA Insurance, recalled that seven hurricanes made landfall in the U.S. in an 18-month period in 2004 and 2006. “People really thought the calculus had changed on cat risk. And it had,” he said, going on to describe subsequent actions from rating agency Standard & Poor’s that forced reinsurers to raise capital or write less business.

Fast forwarding to the last five years, James reported that there have been eight major U.S. landfalling hurricanes since 2017, noting the similarly to the 2004-05 period. “But what mainly is different now is secondary catastrophe perils increasing in frequency quite a bit—since 2011. [And] cat models, AIR and RMS, generally don’t capture this properly. They’re working on trying to capture this properly,” he said.

“If you think severe convective storm, wildfire, hail and flood, and winter storms as a handful of secondary perils, these are now causing more loss dollars than hurricane on an annual basis,” he added, referring to this as a “massive challenge for all property writers—reinsurers and insurers”—as they evaluate the risks and price this into the business, and urging executives in attendance to use better models, question current models and stress loss cost assumptions. “Hurricane and earthquake are well priced in the models, and they’re well understood for the most part. But it’s all these other perils that are adding up to be more of a loss problem on the portfolio than we’ve seen in a long time,” he said.

Capitalization vs. Deployment

In their market outlook report, AM Best analysts noted asset stresses on reinsurers’ financial strength, noting that unrealized investment losses on fixed income instruments will push down overall available reinsurance capital at year-end 2022.

Drawing a distinction between available and deployed capital, however, the report notes that reinsurers are protecting their balance sheets—keeping “a material amount of dry powder” or undeployed capital—as they wait for the best opportunities to deploy it.

As for new capital, it has not had a material impact on market conditions, the report says, noting that this is in contrast to previous hardening cycles. “After early signs of enthusiasm and the emergence of a few startups since 2019, execution has been slow and inconsistent, ” the report says, suggesting that regulatory and recruitment delays have slow the paced. “Business plans have been downsized or changed suddenly based on opportunistic deals rather than on solid strategies. Several projects have not yet seen the light of day. Crucially, investors remain extremely cautious,” the report says.