Property cat seen +5-15%, retrocession +20-25% at July 1st renewal: KBW

Expectations for further strong rate increases at the July 1st reinsurance renewals are clear, with analysts from KBW explaining that the market is discussing increases of between +5% to +15% for U.S. southeast property catastrophe reinsurance programs, with retrocession rates seen up even more at +20% to +25%.

The market has been anticipating the recent rate hardening seen at the June reinsurance renewals to continue in July.

In fact many sources are anticipating this will continue, at least to the key January 2021 renewals, perhaps even longer.

As we explained on Friday, insurance-linked securities (ILS) specialist fund manager Leadenhall Capital Partners said that reinsurance pricing is expected to rise strongly at the July 1st 2020 renewals, with retrocession likely to be an area of particular increase.

Analysts from Keefe, Bruyette & Woods (KBW) concur with this assessment and have provided some new forecasts, based on what they are hearing from reinsurance market participants.

These are all increases that are expected on top of those achieved in January, when some U.S. nationwide programs and much of the global retrocession market is renewed.

First, U.S. property catastrophe reinsurance programs in the southeast region, one of the key peak peril zones for hurricane risks.

Here, KBW’s analysts say that their discussions found that market participants are anticipating rate increases of between +5% to +15%.

While this region in the main doesn’t include Florida, as most of that business had already renewed at June 1st, the increases are consistent considering other states don’t have the same social inflation and carrier performance issues that elevated Florida reinsurance rates so much higher.

Another segment of the U.S. market that renews its reinsurance at July 1st are nationwide programs of large primary insurance carriers and here KBW’s analysts say to expect high single-digit rate increases on nationwide wind exposed reinsurance program renewals.

We understand that programs carrying more earthquake than wind exposure are also seen to be flat to slightly rising as well, with the market clearly seeming to be lifting its baseline reinsurance pricing even for accounts that are relatively loss-free, or more diversifying in nature.

While retrocession is a smaller component of the renewals in July, compared to January, the analysts are expecting strong increases on top of those achieved earlier this year.

KBW’s team forecasts that retrocessional reinsurance rates will renew some +20% to +25% up on January’s increases at July 1st, a further significant hardening for that market to deal with at this key time when retro capital has become increasingly important for some.

These increases are aligned with those being discussed and expected by our sources in the market and reflect continued firming of pricing, over and above the rate increases achieved at the renewals in January this year.

This may set the precedent for the January 2021 reinsurance renewals, to a degree, as well.

If retrocession pricing is being seen to rise to beyond the levels seen in January, for programs and accounts renewing at July 1st, then those retro placements that renew again in January 2021 will likely be subject to further increases, unless something dampens down this hardening before the end of this year.

It’s no wonder so many want to raise capital to take advantage of rates now and into the January 2021 renewals, as these are some of the best priced reinsurance and retro opportunities seen in more than a decade.

KBW’s analyst team says that the driver is the pandemic, as “Covid-19 underwriting losses have transformed pricing from improving/hardening to further improving/genuinely hard.”

Underneath the Covid-19 effect on reinsurance and retrocession pricing is also the dynamic of cumulative price reductions seen across repeated renewal seasons, as well as the fact severity and unmodelled losses have been seen to be rising by many.

The additional prospect of more trapped insurance-linked securities (ILS) collateral and capital this year also helps to drive rates higher at this time.

Evidence of a hardening reinsurance market is also available away from property and catastrophe risks, with some D&O and E&O casualty line renewals said to be increasing by +70% to +100%, the analysts said.

This kind of hardening is going to continue to attract new capital to the sector, so we should expect to see further announcements in the coming weeks of this nature.

Read all of our reinsurance renewals news and analysis here.