Higher-layers & retro reinsurance to see some rate pressure, Europe to increase: KBW

At the January 2024 reinsurance renewals, the expectation from market participants in Bermuda is that the areas that will see the greatest pressure on rates will be in the higher layers and retrocession, while the European catastrophe reinsurance renewals are expected to see increases, analysts at KBW have said.

Having visited Bermuda to speak with reinsurance firms, brokers and some insurance-linked securities (ILS) fund managers, KBW’s equity analyst team came away feeling there was a lack of agreement on where the renewals would complete.

The disagreement is largely over whether reinsurance rates at 1/1 2024 will be “flat to down a little” or “flat to up a little”, KBW’s analysts explained.

Where you land on that likely depends where in the market chain you sit, as well as how much capital you are expecting to come in, it seems.

Importantly, KBW’s analysts said, “Virtually all Bermudian executives we heard expect stable terms and conditions to sustain a strong 2024 property reinsurance operating environment.”

KBW said that the impression they were left with was that most early renewal signings of catastrophe reinsurance had “priced up slightly” but that expectations for those pricing over the coming weeks varied, depending on layer.

Interestingly, the analysts felt that ILS managers were more pessimistic over rates, than reinsurers or even brokers.

The two areas expected to see the most rate pressure, in property catastrophe reinsurance renewals, are the higher-layers of reinsurance towers and certain retrocession renewals.

“Rates are declining a little for very high layers, which have had several years of good experience and have experienced solid capital inflows, especially for catastrophe bonds. Similarly, rates are declining for retrocessional reinsurance, which represents only about $25 billion of total limit and is therefore quite sensitive to modest capital inflows,” the analysts said.

Adding that, “On the other hand, coverage for very low layers (essentially the layers below where attachment points ended up during the January 1, 2023 renewals, as well as aggregate covers) is overwhelmingly unavailable, or (with very few exceptions) is expensive enough to be impractical.”

This refers to the emergence of reinsurance protection gaps, especially at these lower-layers or in frequency covers, such as aggregate contracts, which speaks to the need for industry structuring innovation to help in filling in some gaps with willing capacity.

In the layers that sit above the attachment points installed at the 1/1 2023 renewal, KBW said the expectations are for flat to slightly down or up at 1/1 2024.

Importantly, terms and conditions are expected to hold steady by most, while any increased supply is anticipated to be met by ample demand, it seems.

The European property catastrophe reinsurance renewals may be a little different, given the loss experience and fact the market had not hardened as considerably there, as it had in the United States.

KBW’s analysts said, “European catastrophe reinsurance rates are rising by high single digits overall, and in the teens to low 20%s for loss-impacted accounts, dampened somewhat by the bigger European reinsurers’ historical regional dominance and enduring market share protection focus (and a modest decline within the new RMS model).”

Another area of potential challenge is among US mutual insurers that had Midwestern exposure, as the proliferation of convective storm and severe weather losses has hurt them badly and some “cannot raise rates by enough to afford higher reinsurance costs,” KBW’s analyst team stated.

Overall, KBW’s analysts say they would opt for the slightly pessimistic forecast side, on the reinsurance renewals, of slightly negative rate movements in many areas of the market.

Read all of our reinsurance renewals coverage here.