$75bn+ loss needed to temper reinsurance optimism: Marsh McLennan Agency

With the reinsurance market increasingly optimistic and more capacity emerging, Marsh McLennan Agency has said that it would take a single loss event costing the industry more than $75 billion to temper that.

A report from Marsh McLennan Agency notes that reinsurance costs have been a driver of higher costs for property owners, but the company now feels the reinsurance market is more balanced in 2024.

While the report also notes increased market capacity and a greater underwriting appetite from carriers, these factors need to match the rising demand for coverage terms and increased limits as well.

Rates may slow, in US property risks, but Marsh McLennan Agency notes that “conservative underwriting practices remain as a more sustainable “normal” is established.”

Significant climate and weather related losses have driven the changes to risk appetite and of course been a key driver for rising reinsurance prices as well.

At the same time, inflation and supply-chain factors have been additional drivers for the consistent rise in proeprty insurance pricing.

As a result, Marsh McLennan Agency sees reinsurance costs as one of three key trends driving property rates for 2024, alongside the rise in losses driven by historically non-modeled secondary perils and underinsured property related issues.

The firm explained, “Over the last few years, active secondary perils and changes in reinsurance structures also left insurance carriers covering losses on their balance sheets instead of passing them back to reinsurers.

“However, the volatility experienced in the 2023 reinsurance market seems to have stabilized.

“The reported total median risk-adjusted price increases were in the single digits following treaty renewals from the first of this year. As more optimism enters the reinsurance market, we can expect a gradual return of appetite and capacity.”

Marsh McLennan Agency also said that further evidence of the stabilisation of reinsurance appetites and capacity comes from the fact that at the January 2024 renewals, reinsurers could consider perils that had been previously excluded or restricted, including terrorism and strikes, riots, and civil commotion.

They added, “As the market continues to improve and reinsurance appetites return, increases will trend down. Even coverage rates in Florida, which increased 250% since 2017, will be mostly caught up in 2024. Reinsurers adjusted their rates in 2022 and 2023 to make up for years of large catastrophe losses.”

But further caution that, “Of course, there is no way to perfectly predict the frequency or severity of losses that may come from primary or secondary perils in 2024. It would take quite a bit for red flags to be raised.”

Interestingly, Marsh McLennan Agency highlights that a potential red flag could be a major single loss event occurring.

Saying, “As we enter a more buoyant market, it would take a single insured event resulting in more than $75 billion in losses to temper the cautious optimism in reinsurance.”

Why is this interesting?

In previous years, not too far back, market participants often cited the size of a single large catastrophe event that had the ability to steel the reinsurance market’s resolve as being in the region of $30 billion to $50 billion.

Just a year and a half ago hurricane Ian drove a significant further hardening of reinsurance and insurance-linked securities (ILS) pricing, including in catastrophe bonds. Of course there were a number of catalysts in the run up to that event.

But, the industry loss estimates for hurricane Ian have trended gradually lower, from around the $70 billion mark to now just under $50 billion.

So, Marsh McLennan Agency saying that a $75 billion plus industry loss event is now required, to temper that cautious optimism that is returning in reinsurance, perhaps underlines that the market is considerably more balanced now, but also that event loss expectations are now generally higher, with the effect of the inflation and exposure increases that we’ve seen.