KBW “modestly optimistic” on property catastrophe pricing in 2022

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Following recent pre-announcements of natural catastrophe losses from the third-quarter of 2021 and with the expectation that more will be delivered, with the industry facing a relatively significant quarterly catastrophe burden, KBW’s analyst team note that they are “modestly optimistic” on property catastrophe reinsurance pricing for the 2022 renewals.

kbw-logoTriggering KBW’s flash note yesterday was the significant loss pre-announcement from Bermudian reinsurance firm RenaissanceRe, which at $725 million net, is estimated by KBW to include gross balance-sheet losses of over $1 billion and an additional estimated $210 million for RenaissanceRe’s third-party capital vehicles and investors.

Fellow Bermudian Arch Capital also said this week that it anticipates up to $345 million of net losses from Q3 catastrophe events.

Industry estimates suggest that the third-quarter major catastrophe events could generate industry-wide losses of around $50 billion, which is set to dent third-quarter earnings for many.

This is expected to drive more loss pre-announcements over the coming days, before the Q3 reporting season begins in earnest.

Despite the industry’s “history of initially underestimating major catastrophe losses”, the KBW analysts note that estimates for this quarter may “materially exceed current sell-side estimates.”

This is because, not all estimates have been updated, but perhaps more importantly “construction material and labor costs reflect supply chain disruptions and other shortages (themselves potentially exacerbated by the actual catastrophes).”

The industry may well be accounting for more inflation in its estimates this year, having been burned repeatedly after major catastrophes and the loss creep that followed.

Loss creep isn’t always driven by loss increases. Sometimes it’s purely a function of estimates having been too low in the first place and then consistently trying to catch up as uncertainty ranges narrow.

While the industry is extremely well-capitalised and able to bear these recent significant catastrophe losses and all the companies revealing estimates are pegging them around where their market-share would suggest they should be, the attrition to earnings and the perception of catastrophe, weather and climate volatility, look set to provide further impetus for rising reinsurance rates.

KBW’s analyst team said, “We’re modestly optimistic about property catastrophe reinsurance pricing in 2022.”

Adding that, “Capital remains abundant, but persistent unusual weather patterns and potentially stricter rating agency attitudes toward climate-related loss trends will likely boost both reinsurance demand and capital providers’ expected return requirements.”

European reinsurers are talking of the need for more rate on property catastrophe risks in that continent, following the major flooding and severe convective storm losses seen in 2021.

At the same time, US carriers and those writing reinsurance there, are likely to continue pushing for more rate increases, as losses have been significant enough to maintain some upwards pressure, while many would say that rates haven’t risen enough yet to account for the loss activity even prior to 2021.

We discussed evolving rating agency attitudes to catastrophe and climate risk related capital charges in an article just last week.

There’s no guarantee actions are taken, but rating agencies are looking closely at capital charges we understand and that could be a significant catalyst for more rate adequacy being required to continue assuming catastrophe risks at the same rates.

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