Reinsurers determined to hold ground on cat as per risk comes into focus

With casualty the topic du jour through the fall conference season and a relatively mild hurricane season so far, the expectation is of a stable US cat XoL reinsurance market at 1.1 as reinsurers instead target other areas of property for improvement, including per risk treaties.

This time last year the market was counting the cost of Hurricane Ian and assessing a dramatic shift in supply and demand dynamics, with the latter significantly increasing to account for inflation and rising exposures, and the former constrained as a number of reinsurers retrenched.

The dislocation that followed was challenging for both sides and led to strained relationships in some cases, with buyers ultimately having to pay significant rate increases and assume much higher retentions in what has since been described as a generational hard market.

As Marcus Winter, CEO of Munich Re US, put it in an interview with this publication yesterday, a “re-baselining” took place that was not driven by classical hard market factors but instead by a structural change as the supply curve shifted.

After more orderly behavior returned during mid-year US renewals, the focus of reinsurers in the lead-up to 1 January 2024 is very much on not giving back ground to cedants on property cat XoL placements.

And while there have been some public declarations from brokers that there could be some relief for buyers, privately the acknowledgement is that the market is unlikely to reverse, with cedants likely to have to accept increases in line with inflation at best.

“Do we need price? We’ll have to continue to push for increases, the extent of which we’ll see. But if you think that inflation is 7 or 8 percent, that’s the minimum that we need to see, and it’s probably more.

“That also means the retentions will have to increase by the same amount as inflation, just to stay stable – that could be another problem,” a senior executive at one major reinsurer told this publication.

Another said that in property cat XoL, 2024 renewals will likely see an “evolutionary trend” with continuous dialogue as reinsurers seek to sustain the “step change” that took place this year, in part to adjust for inflation, but also an elevated view of risk.

“I think the industry – the cedants, brokers and reinsurers – have done a good job to better understand how this translates to higher insured values, what to do with deductibles and how to reassess your expectations going forward.

“The big question mark in property cat this year is when we talk to clients and people say to expect risk-adjusted flat or not. But that depends on what you mean by risk-adjusted,” said a senior executive at another major reinsurer.

They added that if risk-adjusted is used in the proper sense to mean the same margin of profitability for 2024 – including fully factoring in trends that are being seen on the extreme weather front – they would be fine with that.

“Some may only think risk-adjusted refers to inflation, but then you have to account for developments we see for extreme weather. This is true for secondary perils, which have caused a lot of attention this year and last year,” said the reinsurance executive.

Other areas of focus are likely to include cleaning up of wordings around event definition, particularly in relation to strikes, riots and civil commotion (SRCC), along with reinstatements.

And on the demand side of the equation, there is some expectation that – budgets allowing – a number of buyers will look to top up coverage at the higher end of towers.

Last year it was expected that significant amounts of new top layer limit would be purchased by insurers to reflect the impact of inflation on exposure bases, with some forecasting as much as $20bn of extra buying in the US alone.

Most of that didn’t transpire, as cedants were faced with the cost of reinsurance rising more than expected, challenging budgets and leaving them paying more for less cover.

This year, Chubb has been among those out in the market buying extra limit at the top, and there are some who expect further material purchasing to follow from other insurers in the coming months.

So far, the new RMS Version 23 model does not appear to be having a meaningful impact on demand, despite expected losses shifting higher in a number of cat-prone states. The expectation is that the impact will lag as insurers hold off on implementing the changes as long as they can to avoid stretching budgets further.

The SCS issue

One major factor coming into play at the upcoming renewal is the impact of elevated severe convective storm (SCS) losses in 2023, in the latest example of the pain secondary peril events are causing carriers.

The frequency of mid-level severity from the events has been exacerbated by the significantly higher retentions most carriers have been forced to take on their cat programs, leaving their earnings – and in some instances balance sheets – heavily exposed.

As we report in our second lead article today, this has been particularly damaging for mutual insurers, especially those with a footprint in some of the states that have been worst affected.

Also reported later in this issue, insured losses this year from natural catastrophes are expected to again top $100bn, despite a lack of large losses from this year’s Atlantic hurricane season, even if there has been plenty of activity and some near misses (with four weeks still to run).

Preliminary estimates from brokers Aon and Gallagher Re have suggested insured losses of $88bn and $93bn respectively at the end of Q3.

And SCS have been the main driver of losses. Gallagher Re has estimated US SCS losses at $54bn for the nine-month period, with Aon putting the overall loss in a similar region – by far a record for the peril.

There have also been a record number of $1bn+ loss events in the US so far this year.

With the lack of readily available aggregate protection in recent years – driven by loss activity and reinsurer retrenchment – and higher retentions, primary insurers have been left bearing the brunt of losses.

But any hopes of being able to buy down into retentions would appear to be forlorn.

Sources have suggested broker strategies may include attempting to package programs so that reinsurers supporting lower layers get bigger shares on the more attractive layers higher up.

There is skepticism over whether this will work, however.

“The problem is finding the right price, and I don’t think they know what the right price is. There will be tough discussions on the bottom layers and there will be attempts to leverage the bottom for the rest of the programs,” one senior source said.

One potential solution that buyers are increasingly looking at is parametric covers, as they attempt to secure some kind of protection within retentions.

Per risk focus

While reinsurers have been spared a major impact from frequency losses this year because of higher retentions on cat XoL towers, one area where they have continued to be hit is on property per risk treaties.

“Those deals haven’t performed for a number of years and there was so much focus on cat capacity last year that they kind of flew under the radar,” said a senior executive at one of the major reinsurers.

They suggested that there could be a similar focus from reinsurers on the per risk market as there was on driving change in cat XoL at 2023 renewals, to address combined ratios that at the industry level have been above 100 percent for a number of years.

“Buyers are going to want [the protection] but it’s going to be like the aggregate market, where pretty quickly they’re going to see the capacity is not there as it was before. So they’re going to trade across their portfolio, they’ll tie it to the cat and to the casualty to try to package stuff to get it done,” said the executive.

Another senior reinsurer executive said his company will also be focusing on improving per risk terms.

“The US per risk programs have not made money over five or 10 years. It’s frequency, cheap capacity and the wordings were too broad. Again it’s a problem of pricing and attachment,” they said.

As well as that focus, reinsurers will look to tighten wordings on per risk treaties in areas like silent cyber and SRCC.