Reinsurance rates need to catch up at June/July 2022 renewals

Reinsurance rates and pricing have more ground to cover at the important June and July renewal seasons in 2022, as analysts and our sources all agree there is further catching up to do.

Reinsurance has often been cited as a squeezed middle, between primary insurance and retrocession, mainly because rates have been seen to accelerate first and faster in primary business, while retrocession has often outpaced treaty price rises.

That seems to have happened again at the January 2022 reinsurance renewals, with primary rates having risen strongly through 2021, reinsurance only rising on average by around 10% at the renewals (global property cat), while retrocession was seen to rise faster at an average of 15% or more.

As we’ve documented, primary catastrophe exposed property insurance rates have been rising particularly fast, with homeowners and commercial property owners paying increases as high as 40%, sometimes more.

In the retrocession world, some rates have risen by far more than the 15% average we previously reported, and as we explained, Howden’s data shows retro pricing is now on average some 75% higher than in 2017.

Global property catastrophe reinsurance rates, meanwhile, were measured to have increased by 10.8% by Guy Carpenter based on its Index, while Howden saw the increase as lower at 9%.

If we look back at Guy Carpenter’s Index, then property catastrophe reinsurance rates are now only 30% higher than they were at the bottom in 2017.

Compared to the 75% increase seen in retrocession rates and pricing since 2017, it’s clear that reinsurance rates continue to lag significantly behind.

Also of note, Howden’s retrocession rate-on-line index shows rates in 2022 are almost back at their peaks seen in 2009, while property catastrophe reinsurance remains a whole 17% below the 2009 average.

All of which suggests that reinsurance rates have more catching up to do, in order to get them to a level that sits better alongside higher primary insurance and retrocession. With the alternative being that softening is in order for primary and retro lines, which seems very unlikely given loss trends, inflation and climate risk concerns.

While rates have risen in reinsurance, some market participants currently believe that property catastrophe risk, on a risk-adjusted basis, remains underpriced and that the gains made are not even accounting for inflationary factors, let alone average (normal?) loss years.

So, many of our sources are forecasting further reinsurance rate firming at the all-important June and July renewals, while for April’s renewals they anticipate something closer to flat, albeit with some loss impacted programs of recent years continuing to rise.

June and July are the critical ones, after another significant global catastrophe loss year, which Munich Re estimated as a $120 billion insured loss but with the majority coming from the United States, where the mid-year renewals focus, it seems likely the market will at least attempt to hold the trajectory true and continue firming, if not hardening.

While there is likely to be some pushback from primary carriers, who already in many cases are feeling pain from higher reinsurance costs, it is important to remember that these primary players are largely expanding their underwriting into the harder marketplace.

Even in Florida, where a growing number of primary carriers are targeting growth again, there’s likely to be a significant noise about further reinsurance rate increases, but in a much harder primary property insurance market it seems warranted for rates to increase at the reinsurance end again.

As if reinsurers and insurance-linked securities (ILS) funds fail to push for more rate increase in 2022, they risk falling further behind and also this raises the spectre of even steeper increases when the next really major catastrophes occur.

For example, carriers in Florida would be better off paying risk commensurate reinsurance rates today, rather than that market flattening off only to see far steeper increases after the next, inevitable, major hurricane landfall in the state.

Analyst teams are largely quite bullish about the chance of additional firming in Florida and more widely at the mid-year 2022 reinsurance renewal season.

As we explained yesterday, rate adequacy for catastrophe exposures is a significant topic of debate following the January renewal season.

Impacts across the United States in 2022 showed that, even a year without multiple major hurricanes can be a really significant loss for reinsurance and ILS.

Had we seen a few more major hurricane landfalls, as is entirely possible, then annual insured disaster losses could easily be imagined as approaching $200 billion, or higher.

These debates need to continue, as the reinsurance and ILS market need to deliver on their promises of returns to investors and shareholders on a more sustainable basis.

There are product specific issues here, as it’s clear some portfolios are delivering and have continued to through challenging catastrophe loss years (such as many catastrophe bond funds), while others are not (retro, aggregates and riskier layer reinsurance strategies).

Analysts at Goldman Sachs said they expect property reinsurance costs to keep rising through 2022, while brokers we’ve spoken with all suggest more firming should be anticipated at June and July.

It’s to be hoped that underwriters stick to their guns through 2022 and demand risk adequate pricing that delivers an ability to meet their promises to investors and shareholders.

In the ILS market, trapped capital and collateral issues are likely to stay with underwriters through the first-half of this year, making capital constrained and increasing the desire to raise pricing.

There could also be some surprises related to hurricane Ida, as we’re hearing of a strong chance that some reserves for the loss are hardened early in the year.

Given all of those issues that are carried over from 2021, the general feeling that reinsurance pricing isn’t keeping pace, as well as concerns over inflationary factors, loss amplification, climate risk trends and general fear of frequency, it seems safe to assume many market participants will be pushing hard for more rate in 2022.

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