Cedants to forego extra reinsurance protection in 2024 amid price increases: Moody’s

Primary insurers are set to absorb a greater share of future losses as reinsurances rates rise, according to a report from Moody’s.

The report noted that cedants are intending to purchase additional reinsurance protection, or else considering reducing their coverage in certain lines, amidst expectations that reinsurance rates will continue to rise across all lines in 2024.

In Moody’s annual survey of 42 global P&C reinsurance buyers, the firm noted that anticipated price increases reflect ongoing claims inflation, especially in property lines, as well as somewhat more limited reinsurance capacity.

More than 70 percent of respondents expect further price increases across both property and casualty lines in 2024 as a result of climate-related uncertainty and the inflationary environment.

However, the overall pace of price rises is expected to slow to the mid-single digits, with around 44 percent of cedants anticipating casualty reinsurance price increases of more than 5 percent.

This marks similar levels to 2023, despite signs of price stagnation or even decline in some primary casualty lines in the year to date, Moody’s noted.

And while respondents also expected mid-single digit increases in property reinsurance costs, this marks a slight slowdown from significant rises in 2023.

“This would mark the seventh consecutive year of price increases since 2017, when the industry incurred record catastrophe losses,” said Moody’s.

“Cedants forecast the strongest price increases in catastrophe-exposed property lines, particularly in the US and Caribbean market, with 52 percent expecting price rises of more than 7.5 percent, only slightly below 56 percent last year.”

According to respondents, anticipated price increases are predominantly driven by loss cost trends which look unlikely to change, particularly casualty losses, which continue to face rising economic and social inflation.

Most cedants expect nat cat losses to remain at current above-average levels, while 44 percent expect them to increase further.

“We agree with the latter, taking the view that high reconstruction costs, increasing insured exposures and rising temperatures will contribute to increased frequency and severity of physical climate-related claims,” said Moody’s.

As well as the growing influence of secondary perils, such as US thunderstorms, issues are arising over the difficulty of distinguishing the influence of climate change from normal weather cycle variability when assessing events like hurricanes.

“We believe increased physical climate risks introduce greater uncertainty regarding price adequacy,” said the report.

“The growing frequency and severity of secondary perils such as convective storms, floods and wildfires, combined with higher claims severity because of economic inflation, is making it more difficult for reinsurers to determining appropriate pricing levels.”

Limited appetite to increase reinsurance coverage

A majority of respondents (91 percent) said they do not intend to purchase more reinsurance protection in 2024, primarily due to its high cost.

In addition, 64 percent of cedants said they consider it unlikely that they will buy more aggregate reinsurance cover. Moody’s noted this is in stark contrast to last year, where nearly half of respondents said they would buy more aggregate cover.

“The primary reason for insurers choosing not to increase their protection is the higher cost of reinsurance,” said Moody’s.

“With traditional reinsurers tightening capacity, and some completely exiting the property catastrophe market, primary insurers have emphasised the importance of long-lasting relationships and the availability of comprehensive range of coverage when selecting their reinsurance partners.”

The report also highlighted an increase in the number of insurers considering a reduction in their reinsurance protection, particularly in casualty and US/Caribbean property lines.

Around one-third expect to buy less quota share coverage in 2024, while half expect excess-of-loss attachment points to increase further – indicating that the primary market will retain more risk than in previous years.

“Because of changes in reinsurance programs and rising claims costs, primary insurers are likely to retain even more risk into 2024, making their results more volatile,” Moody’s added.

“Insurers with limited or no geographic diversification are likely to be more affected by this change. However, in our view, a number of globally diversified players have managed to reduce their gross exposure to offset the higher level of retention.”

Demand for collateralised reinsurance and cat bonds has increased

The retrenchment of traditional reinsurance capacity has coincided with the limited growth of alternative reinsurance capacity in recent years, with Moody’s noting that it does not foresee a rebound in 2024.

More than three-quarters (78 percent) of surveyed primary groups do not expect to increase their use of alternative capital protection in the next 12-18 months.

However, respondents did express an increased interest in using collateralised reinsurance.

“We believe this trend has emerged as traditional reinsurers prices have increased meaningfully. Catastrophe bonds issuances are also expected to continue growing into 2024, while appetite for sidecars and insurance-linked funds is more limited,” the report concluded.