Renewals: Some elevated appetites seen, but property cat gap writ large

According to Artemis’ sources there have been some signs of increased appetites among certain markets, but in general the ongoing and yet-to-clear January 2023 reinsurance renewals have exposed a gulf between property catastrophe capacity and demand for cover.

Sources describe a particularly challenging time clearing US property reinsurance renewals this year, with significant gaps in programs still to be filled and no signs that all cedents will be able to secure the capacity they want by, or even soon after, January 1st.

All of the forces we’ve discussed in-depth in recent weeks have remained in-play right through to the end of the year.

A wholesale restructuring of property catastrophe reinsurance risk appetites and return expectations is the way this January 2023 renewal is being characterised to us.

While a fundamental rethink, about the way reinsurance programs attach, what they cover (a named peril focus) and the finer details of their terms of coverage (shorter hours clauses etc), is evident renewals market-wide.

How the economics of underwriting property catastrophe risk are split, between primary writer, reinsurer and retrocessionaire sources of capacity, is also front of mind, we’re told.

This change in the split, of the economics of writing, assuming and holding cat risk, is responsible for driving a lot of the fundamental change being seen, according to sources.

In Europe, we’re told property reinsurance renewals are clearing and many are set to be completed in time for 1/1, but with some of the steepest price increases seen in well over a decade on top of the tighter terms and conditions of coverage being seen globally.

In the United States, the reinsurance programs up for renewal are still in a variety of stages of completion at this late stage of the year, we understand.

Some are clearing, some set to clear but with holes, while others remain far from complete and negotiations are ongoing.

As a result, the expectation remains that this renewal could be particularly late and while there is some increase in appetites to write catastrophe exposed layers of reinsurance towers being seen among the usual suspects, and some success in terms of fundraising and capacity increase, it’s far from sufficient to offset the reduced appetite being seen elsewhere.

One resounding message from all corners of this renewal marketplace, is that retrocession, its availability, terms and price, is a key driver for adjustments to reinsurer risk appetites.

With reinsurers uncertain on retro availability, it has hindered their ability to provide price indications, which some of our broking sources are bemoaning as the most significant bottle-neck in some areas of the market, especially at lower-layers of reinsurance towers.

Insurance-linked securities (ILS) funds have been seen to become a driver of higher pricing in certain areas of the market as well. Particularly in those layers that ILS funds were becoming dominant capacity providers to in recent years, but now their appetites have reduced and available capacity dropped as well.

Overall though, our sources at reinsurance and retro markets, including ILS funds, talk about the need for a rebalancing of the economics for the underwriting of cat risk, while broking sources tend to focus on the challenges driven by a dearth of capacity.

What had been characterised as a property catastrophe reinsurance market deficiency of some $20 billion way back in September, had been upgraded to a cat capacity gap of up to $40 billion by December.

But now, most sources suggest the actual capacity shortfall for this renewals could have been closer to $60 billion, perhaps even a little more, as appetites for cover started off significantly higher than the levels of reinsurance and retro that will actually clear.

Most of the shortfall has been managed through the increase in attachment points seen, but there will still be gaps and there could be cedents that go into 2023 with what could be considered inappropriate levels of reinsurance in place, making for an interesting year if weather and catastrophe loss frequency are elevated in any way.

The capacity gap is one part of it, managed through how programs respond.

But the appetite gap and the economics gap, in terms of where markets want to deploy their capital and how they want to get paid for deploying it, could be the bigger story and the one that ultimately drivers longer-lasting change.

Reinsurance brokers talk about a hope the market will find an equilibrium after the 1/1 2023 renewals, with some new capital expected to flow through 2023 to help in satisfying demand for capacity but also extinguishing the demand for even higher prices.

It’s questionable though, whether this 1/1 renewals will see the market clear at pricing that can be considered to actually be based on the fundamentals of writing catastrophe risk (so the return capital really needs).

Or whether, the proliferation of gaps and the challenging process to get to any reinsurance placement at all, means the prices that get reported in renewals analysis are not yet a true reflection of the fundamentally changed risk appetite of reinsurance capital, the need for more aligned economics along the market chain and the urgent requirement for greater visibility of market capacity and appetite.

The prices that truly reflect those factors could be either higher or lower, it seems, depending on how the renewal and market-clearing process itself modernises and is adapted to better suit the environment we find ourselves in today.

Read all of our reinsurance renewals news and analysis here.