Hurricane Ian disrupts already difficult reinsurance renewal season

DALLAS – U.S. reinsurance buyers should be prepared to be flexible in the face of what experts say will be a difficult property cat market punctuated by further price hikes and constrained capacity at Jan. 1, 2023, renewals.

An already tough year-end renewal just got more complicated when Hurricane Ian made landfall in Florida on Sept. 28 as a Category 4 storm, according to brokers, reinsurers and insurers attending the American Property Casualty Insurance Association’s annual meeting in Dallas Oct. 2-4.

Estimated insured losses from Ian range from $20 billion at the low end to more than $70 billion, according to various catastrophe modelers.

Inflation, and its effect on construction and replacement costs, rising catastrophe losses and the likelihood of further rate increases were top of discussions ahead of Jan. 1, APCIA attendees said.

Supply-demand imbalance

Ian had an immediate effect on available capacity, which is going to be a challenge for the industry, said Justin Lorence, Minneapolis-based senior broker at Lockton Re, part of Lockton Cos. LLC.

“The largest of the large reinsurers were already trying to come to grips with how they’d support potential increased demand at 1/1 in light of inflation and the risk appetites of clients,” he said.

Supply and demand could become further unbalanced going into renewals, Mr. Lorence said.

“That could change depending on early results from this event and the attractiveness of coming into the cat space in an increasingly tightening environment, but we won’t know that until closer to 1/1,” he said.

The availability, or not, of retrocessional capacity – reinsurance for reinsurers – and how the insurance-linked securities market, which provides significant retro capacity, responds are other variables, Mr. Lorence said.

Inflation and catastrophe losses are adding to the supply-demand imbalance in property catastrophe reinsurance, said Paul Anderson, executive managing director, U.S. property growth leader at Aon PLC.

“We’ve seen an increase in cat losses over the last five years,” which has challenged reinsurers to think about how much capacity they might deploy going forward, Mr. Anderson said.

Global reinsurer capital declined by 11%, or $75 billion, to $600 billion in the first half of 2022, driven mainly by substantial unrealized losses on investment portfolios, Aon said in its reinsurance renewal report published in September. Meanwhile, insurers sought an estimated additional $5 billion in reinsurance limits at June 1 and July 1 renewals.

A further $10 billion to $20 billion in limits is being sought at Jan. 1, Mr. Anderson said. “What everyone’s working through right now is where that capacity will come from … and Ian will add a little challenge along the way,” he said.

Shifting appetites

The numbers are staggering, said Keith Wolfe, president of U.S. property/casualty at Swiss Re Ltd. “I can't envision who and how many new entrants you would need to solve this problem,” he said.

Pre-Hurricane Ian, Swiss Re had planned to support its in-force client base and for additional capital deployment in property cat, mostly related to inflation and supply chain issues, he said.

“That may not be able to happen at this point, but I won’t know for sure until we get a few more days and probably a few more weeks on into this quarter and understand the extent of the horrific damages that have come from Ian,” Mr. Wolfe said.

Munich Reinsurance Co. does not rely on the retro market and its appetite and budgets remain unchanged post-Ian, said Kerri Hamm, executive vice president, head of business development at Munich Re U.S.

However, the reinsurer had already started shifting its property cat deployment in response to inflation at the year-end renewal in 2022 and has moved away from aggregate structures and quota share structures where there was a cat component and where clients were in the admitted market, Ms. Hamm said.

“The regulatory environment has been very difficult in many states, where prior approval for rate changes is necessary and insurers cannot get adequate rate changes to keep up with the inflationary impacts. We started pulling back from those types of structures,” she said.

Most reinsurers will continue to honor their partnerships with their ceding company clients and provide the capacity that they provided previously, said Kael Coleman, CEO of Protecdiv Inc., a brokerage based in Philadelphia.

However, buyers that want to reduce their retention and buy more cover in top layers may struggle to get that done, Mr. Coleman said.

Rising rates

The disruption caused by Hurricane Ian may present an opportunity for new capital to come into the market after an event that pushes rates higher, said Will Garland, president, centers of excellence, at Guy Carpenter & Co. LLC.

Guy Carpenter’s U.S. property catastrophe rate on line index increased 15% year to date at July 1 renewals. “The expectation was that it was still going to be a difficult market at 1/1, but Hurricane Ian has certainly thrown the cards in the air,” Mr. Garland said.

It’s too early to determine what will happen with pricing, said Greg Heerde, head of Americas analytics, reinsurance solutions at Aon PLC. “There will be pressure on pricing. With supply being down and demand up, that generally pushes up the pricing curves.”

Reinsurers have been in a loss-making position for more than five years, said Ms. Hamm. “Because of that, our capital has become more expensive and we need to increase returns on our capital at the same time,” she said.

While Ian is clearly a major property loss for the industry, people are thinking about the potential knock-on effects of shrinking capital, Mr. Wolfe said.

“You’re not immune if you write multiple lines of business from having to make decisions about how to allocate that capital differently. Even this hurricane is going to put pressure on some of the U.S. casualty lines of business,” he said.

Flexible approach

Cedents should come to the table armed with data and be prepared to consider alternatives, Ms. Hamm said. “I would advise clients to be flexible and have backup plans for how they could adjust if the pricing is too high or the capacity is not available,” she said.

Buyers need to demonstrate a command of their portfolio and how they’re dealing with inflation loss estimates, Mr. Lorence said. “Clients need to be thoughtful about the construct of their panel and potential relationship expansion opportunities, while being aware of those reinsurers that are potentially looking to retrench,” he said.

Retentions will rise, Mr. Wolfe said. “If you need more limit on the top of your property program, we’re probably going to need to redeploy the limit at the bottom end of the program,” he said.

Swiss Re has seen two early renewals of sizable catastrophe placements where cedents elected to raise retentions to take some stress off the price of the upper layers, Mr. Wolfe said. “For almost every client in our portfolio that has to be a serious consideration,” he said.

Buyers may need to adjust their thinking and accede to partial placements, Mr. Coleman said. Buyers can then build on that as opposed to regarding it as a failure, he said.

More mid-term placements are likely as buyers look for other ways to get additional coverage, Mr. Coleman said.