Covid-19 “live cat” puts reinsurance into “sustainable hardening” – JMP Securities

The Covid-19 pandemic is like a “live cat” for the reinsurance industry, one that will keep on driving losses, and this combined with the challenges caused by recent consecutive catastrophe loss years appears to have driven the market into a phase of “sustainable hardening,” analysts at JMP Securities have said.

Having spoken with numerous insurance and reinsurance market participants in recent weeks, on both the underwriting and broking sides, the analysts said that they now believe that “the reinsurance market may finally be in for a sustainable hardening.”

Firming over recent years has largely been in short spurts, in reaction to loss events, the analysts explained.

But in every case, rate had been given back shortly after it was gained, largely as capital levels rose on both the traditional and alternative sides of reinsurance.

But, “Now following multiple years of losses globally (most notably in Japan and Florida) that have pressured ILS capacity, combined with the current “live cat” that is COVID-19, the market appears to have entered a sustainable hardening phase,” JMP’s analysts said.

The Florida market is set to absorb reinsurance rate increases of 25% to 35% the analysts believe, which is aligned with other observers in the market.

It does appear that the Florida reinsurance renewals are broadly up at least 20%, with some pockets and specific cedents experiencing much harder rates than that, with increases well over 50% being reported at certain return-periods and for certain players.

Reinsurance market hardening does seem to be broader this time as well, with the analysts suggesting that casualty reinsurance rates are also on the rise, but noting that we’ll need to wait until the January renewals to really know how broad the hard market will get.

“Notably, the market is now applying rate increases to loss-free accounts and terms and conditions are also tightening – two items which to us indicate hardening market conditions are here to stay,” the analysts further explained.

It is the effects of the Covid-19 pandemic and the related losses and continued uncertainty that has driven the June renewal rates for Florida higher, while also providing a platform for more sustainable hardening, it seems.

The JMP Securities analyst team calls Covid-19 a “live cat”.

This is interesting, as yes it is certainly a live and still unfolding global catastrophe event for the insurance and reinsurance market.

But it’s also perhaps the first ever live cat that has driven immediate losses, but could continue to drive losses and volatility through the re/insurance market over a number of years to come.

Live cat events are more typically seen as catastrophes, such as an approaching major hurricane bearing down on the U.S. coastline.

A live cat can drive trading and hedging needs, last minute protection being desirable and adjustments to portfolios and strategies are seen as a result, across both reinsurance and retrocession, as well as in insurance-linked securities (ILS) markets, where instruments such as catastrophe bonds can be traded due to an ongoing live cat event.

This time around, the live cat has already hit, but is now ongoing and still developing, with impacts continuing in the form of loss activity, including developing losses, new claims and as yet to be identified impacts.

At the same time this is a live cat that has hit the investment side of the re/insurers operations and also a live cat that threatens to have a much longer-tail, with casualty claims possible for years to come.

So it would not be a surprise for a more sustainable period of reinsurance price hardening to emerge and almost all analysts believe we’re now seeing this.

We believe that the confluence of numerous events, including the recent years of catastrophe losses, the fact reinsurers have struggled for sustainable profits above cost-of-capital, the hit to the ILS market from trapped capital in consecutive underwriting years, the issues in casualty profitability, the lack of profitability at Lloyd’s, the threat of climate change and emerging risks, and now the live cat that keeps on giving that is the Covid-19 pandemic, all definitely set the stage for broad market hardening right now, but more importantly for a new pricing floor to be established at a higher baseline than seen over the last few years.

As this is the only way the industry gets its profitability back on a broad scale after the pandemic and positions itself as a more sustainable provider of risk capital going forwards.

On the ILS specific side, JMP Securities’ analysts say that there will likely be fresh inflows of capital over the rest of this year and beyond.

But they warn that any capital inflows are likely to come with higher return requirements, something already being seen in the catastrophe bond market, so establishing a new baseline pricing floor for catastrophe risks globally, to provide a better level of profitability based on risk-commensurate pricing seems increasingly likely over the year ahead.

Covid-19 is the live cat that will keep on giving, driving persistent uncertainty for re/insurers. This hardening needs to be held onto as a result, as letting rates slip back to where they dwindled to in recent years just isn’t feasible, unless of course the market can dramatically lower its cost-of-capital, by saving on expenses or using more lower-cost capital sources.

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