The next major set of reinsurance renewals, at January 2023, are set to be a key test for the property catastrophe reinsurance market, in defining whether or not we’re really in a true hard market, according to analysts at JMP Securities.
There were signs at the recent mid-year reinsurance renewals that imply a hard property catastrophe market is already here.
The analysts at JMP Securities highlight “some characteristics of a true hard market”, including the fact we saw “capacity shortfalls where underwriters would not write the risk regardless of price,” for the first time in years.
Underwriters of property catastrophe reinsurance have had a rough time over recent years, with little in the way of improvements to the market.
“While pricing had improved, the frequency and severity of events has kept accelerating as well, leaving significant questions around the adequacy of pricing,” the JMP analysts said.
While rates had improved in the last few years, the terms and conditions around coverage had not kept up and the frequency and secondary peril related loss activity really showed up pricing issues in the market, as covers once thought peak-peril focused were increasingly triggered by an aggregation of smaller events, or outsized losses from perils thought secondary in nature.
As well as the capacity shortfalls, another characteristic of hard reinsurance markets is major players pulling-back.
Here, the analysts from JMP Securities cite the example of AXIS exiting the property cat reinsurance space.
All of which leads them to believe that a property catastrophe hard market may be brewing.
“We believe there are increasing signs a true hard market may be near,” JMP’s analyst team explained.
Adding that, “At the very least there is little sign that pricing increases will abate anytime soon.”
Which leads them to conclude that, “Time will tell and January 1 renewals will be a key test” for the property catastrophe reinsurance marketplace.
But, it’s important to ask here, what exactly needs to be tested at the 1/1 2023 renewal season?
Is it the pure ability of prices to keep rising? The risk appetites of reinsurance firms and insurance-linked securities (ILS) funds? Price discipline across the market?
For us, it is the latter, price discipline and the desire of the market to achieve returns that are risk-commensurate, while factoring in inflationary effects, impacts from secondary perils and more.
Risk-commensurate, is the important piece of that statement. As with continuing improvements in contract structure, terms and coverage conditions, property catastrophe reinsurance rates could reach a ceiling, in rate-on-line or percentage terms, while then having the ability to decline a little given the adjustment in risk being assumed.
Which means it will be important to keep an open-mind on how rates move in January 2023, as a flat or slightly declining rate environment at much more favourable terms for the underwriters, could still imply risk-adjusted rate improvements.
Capital inflows will be another wild-card in how the January 2023 renewals play out for property catastrophe reinsurance rates.
If catastrophe losses remain around expected, or average, levels throughout 2022, then we could see a marketplace that is much better capitalised as we move into 2023, including larger inflows of capital for the ILS fund community.
In reality, the key test for the market at January 2023 may be in how it deploys its capital and how disciplined it can remain if market capacity rises.
If market capital levels increase, due to new fundraising and a potential lack of capital destruction because major loss activity remained in-line with expectations, then the key test for both reinsurers and ILS fund managers will be in demonstrating how they hold-the-line on price.
Read all of our reinsurance renewals news coverage here.
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