Despite softening, reinsurance pricing at 2021/2022 levels “widely viewed as adequate” – KBW

In general, analysts from KBW heard during a recent Bermuda trip that reinsurance pricing is down about 20% at the mid-year renewals (the report is headlined “20% is the new 15%”), but even after the softening taking rates back to levels seen in 2021 to 2022, this is still “widely viewed as adequate”, the analysis explains.

“We pin the headline number for midyear property cat reinsurance renewals risk-adjusted pricing as down 20% (we heard ranges of 15-20%, 17.5-20%, and 20% or more, with the former two often noted to be closer to the 20% end of the ranges),” KBW’s analysts state.

Specifically, the analysts see Florida reinsurance renewals at June 1st as down 17.5-20%, while Nationwide accounts that often get renewed at July 1st are down in the same range.

However, retrocession is only seen as down in the mid-teens year-on-year, which they say is a smaller decrease due to more demand.

However, less bespoke retro contracts, which might include industry-loss warranties (ILW) and similar covers, are expected to be down more it seems.

Summing up on pricing that, “We heard several comparisons of this year’s pricing to 2021/2022 levels, which is still widely viewed as adequate and a far cry from the low point of 2017.”

Terms and conditions are seen as “mostly holding”, albeit with some concessions that improve coverage for reinsurance buyers.

KBW’s analysts said, “Most reinsurers appear far more willing to accept lower pricing than to yield changes on the much improved T&C changes that were achieved at the 1/1/2023 onset of the recent hardening cycle.”

But, the analysts cite a “gamut of minor T&C changes”, such: as minimum premium true-ups to exposure now being allowed to float down and up; Florida reinsurance premiums now being paid quarterly instead of upfront; broadening of retrocession covers to named natural perils, from named specific perils (this is one to watch if events happen); aggregates, cascading covers, and top and drops now being more widely available; plus some modest extension of hours clauses and radius definitions (again, ones to watch when events occur).

On the reinsurance demand side at these renewals, KBW’s analysts note that there is natural demand increase due to Citizens depopulation in Florida, but otherwise carriers are looking to keep savings rather than buy substantially more limit.

On the retrocession side, some reinsurers have been buying more protection, including through cat bonds that are seen as “compellingly priced” as they look to efficiently hedge tail risk.

While some of the Bermuda executives KBW’s analysts met with thought a ~$100 billion catastrophe loss might stop the softening in reinsurance, others said it might take a financial shock.

But the analysts continue to feel an ongoing softening is the most likely outcome, saying, “Given the widely-held view of sustained rate adequacy even after the mid-year renewals and our persistent belief that expected returns matter more than industry capital – absent external shocks, we think expected returns (admittedly often colored by some recency bias) actually drive deployable capacity – we’re very much in the latter camp, leading us to expect decreases in 2027 unless 2H26 catastrophe losses change capital providers’ views of expected returns.”

The fact pricing is widely viewed as adequate still, even though being back at levels just prior to the real hardening that was seen in 2022, the catastrophe bond market is back at similar levels or perhaps even a bit earlier, suggests there is still room for it to fall a little further.

It’s going to be interesting to see how a major loss free year manifests in the January 2027 renewals. As reinsurance rates declined slower at January 1st this year than they have been at the mid-years, it suggests there is some further room to fall in other regions.

Of course, “adequate” also does not mean the same thing for every writer of property cat risk, or investor in cat bonds and ILS, which may become more apparent when the inevitable loss events do occur. Some appetites may revert quicker than others, we suspect.