“Unspectacular” June reinsurance renewals, but increases to persist

Analysts at Keefe, Bruyette & Woods conclude from market feedback that the upcoming June 1st reinsurance renewals are set to be “satisfactory but unspectacular” but that P&C reinsurance rate increases will persist, perhaps for more than two years.

Following discussions with Bermuda and Florida market insurance and reinsurance executives, KBW’s analyst team said that renewals of property catastrophe reinsurance programs in Florida are expected to see their pricing come in below where expectations had been established last year, and then cited insurance-linked securities (ILS) capital in relation to a moderation of rate expectations.

In the third update from recent meetings with market execs, KBW’s analysts explain that, barring a shift in mindset, which is seen as unlikely given how orderly the Florida reinsurance renewals seem, they expect we’ll see broad 5-10%, rate rises, with bigger increases on loss-impacted accounts.

Bigger increases, of as much as 20-30%, are anticipated for Florida-focused property insurers whose expansion into other Gulf states proved less diversifying than initially expected, the analysts also reported.

But even as reinsurance rate expectations come in at levels some would find disappointing in Florida, the market is seemingly more positive on the continuation of recent trajectory, even if not at a stunning momentum.

“Executives still expect P&C (re)insurance rate increases in most lines and regions over the next 24 to 36 months; some lines appear adequately priced, but others (particularly marine, cyber, and other specialty lines) still need – and are achieving – margin-expanding increases,” KBW’s analyst team said.

Primary insurance rate increases are still seen to be outpacing reinsurance ceding commissions for proportional business, which some executives see as a sign that ongoing firming can be expected.

But a return to softening is seen as inevitable, the analysts said.

Explaining, “Although no one disputed the (in our view) inevitable, eventual softening, and few expect ultimate accident-year returns to match those of the 2000-2004 hard market, virtually all executives expect rational and adequate pricing to persist through 2021 and 2022.”

Social inflation remains a topic of concern for the reinsurance market and reopening U.S. courts and case backlog-related pressures are intensifying these concerns among reinsurers.

Storm and catastrophe claim related inflation is thought to be spreading outside of its Tri-County heartland, with some evidence of this becoming more of an issue in other states as well as neighbouring counties.

On market competition, established reinsurance players are not overly concerned about new entrants to the market.

The established companies in reinsurance see their “bigger balance sheets and established reinsurance relationships as giving them broader access to potential risks.”

“Newer reinsurers are typically A- rated, and were described largely as “filling in gaps” (typically within loss- impacted layers; many established reinsurers are moving to higher layers), where last-minute program shortfalls remain,” the analysts said.

So, despite the “unspectacular” reinsurance renewals at the mid-year of 2021, the market is anticipating continued rate improvements and no immediate return to softening.

The wildcard for that, we would say, is a benign hurricane season and a lower catastrophe burden through the rest of this year as a result of that.

Were that to occur, there is every chance US reinsurance programs could be flat to slightly down in 2022, given the building of capacity and the fact catastrophe bonds and ILW’s are offering well-priced coverage already for higher-layers.

Read all of our reinsurance renewals coverage here.