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Hurricane Ian disrupts the already difficult reinsurance season



DALLAS – U.S. reinsurance buyers should be prepared to be flexible in what experts say will be a difficult property tax market marked by further rate increases and limited capacity for Jan. 1, 2023, renewals.

An already tough year-end renewal was only complicated when Hurricane Ian made landfall in Florida on Sept. 28 as a Category 4 storm, according to brokers, reinsurers and underwriters attending the American Property Casualty Insurance Association’s annual meeting in Dallas Oct. 2-4.

Estimated insured losses from Ian range from $20 billion on the low end to more than $70 billion, according to various catastrophe modelers.

Inflation, and its effect on construction and replacement costs, rising catastrophe losses and the likelihood of further interest rate hikes were at the top of the discussions ahead of Jan. 1

, APCIA participants said.

Imbalance between supply and demand

Ian had an immediate effect on available capacity, which will be a challenge for the industry, said Justin Lorence, Minneapolis-based senior broker at Lockton Re, part of Lockton Cos. LLC.

“The biggest of the major reinsurers were already trying to figure out how to support potential increased demand for 1/1 in light of inflation and customer risk appetite,” he said.

Supply and demand may become further imbalanced as one renews, Mr. Lawrence.

“That could change depending on early results from this event and the attractiveness of getting into the cat space in an increasingly tightening environment, but we won’t know until closer to 1/1,” he said.

The availability, or not, of retrocessional capacity — reinsurance for reinsurers — and how the insurance-linked securities market, which provides significant retrocessional capacity, responds are other variables, Mr. Lawrence.

Inflation and catastrophe losses are contributing to the supply-demand imbalance in property catastrophe reinsurance, said Paul Anderson, managing director, U.S. property growth leader at Aon PLC.

“We’ve seen an increase in cat losses over the last five years,” which has challenged reinsurers to think about how much capacity they can use going forward, Anderson said.

Global reinsurance capital fell 11%, or $75 billion, to $600 billion in the first half of 2022, driven primarily by significant unrealized losses on investment portfolios, Aon said in its reinsurance renewal report published in September. Meanwhile, insurers sought an estimated additional $5 billion in reinsurance limits at the June 1 and July 1 renewals.

Another $10 billion to $20 billion in limits is sought Jan. 1, Anderson said. “What everyone is working through right now is where that capacity is going to come from … and Ian will add a little bit of a challenge along the way,” he said.

Changing appetite

The numbers are staggering, said Keith Wolfe, president of US property/casualty at Swiss Re Ltd. “I can’t imagine who and how many new participants you would need to solve this problem,” he said.

Pre-Hurricane Ian, Swiss Re had planned to support its existing customer base and for additional capital investment in real estate, mostly related to inflation and supply chain issues, he said.

“It may not happen at this point, but I won’t know for sure until we get a few more days and probably a few more weeks into this quarter and understand the extent of the terrible damage that has come from Ian,” Mr. Wolfe.

Munich Reinsurance Co. does not rely on the retro market and its appetites and budgets remain unchanged after Ian, said Kerri Hamm, vice president, head of business development at Munich Re US

However, the reinsurer had already started to shift its property placement in response to inflation at the 2022 year-end renewal and has moved away from aggregate and quota share structures where there was a cat component and where clients were in the permitted market, Ms Hamm said.

“The regulatory environment has been very difficult in many states, where pre-approval for rate changes is necessary and insurers can’t get enough rate changes to keep up with the effects of inflation. We started to pull back from those types of structures,” she says.

Most reinsurers will continue to honor their partnerships with their ceding corporate clients and provide the capacity they provided in the past, said Kael Coleman, CEO of Protecdiv Inc., a brokerage based in Philadelphia.

But buyers who want to reduce their retention and buy more top tier coverage may struggle to get it done, Mr. Coleman.

Rising rates

The disruption caused by Hurricane Ian could represent an opportunity for new capital to enter the market after an event that pushes interest rates higher, said Will Garland, president, centers of excellence, at Guy Carpenter & Co. LLC.

Guy Carpenter’s U.S. Real Estate Catastrophe Frequency Online Index is up 15% year-to-date at the July 1 renewals. “The expectation was that it would still be a difficult market at 1/1, but Hurricane Ian has really thrown the cards in the air,” Mr. Garland.

It’s too early to tell what will happen with pricing, said Greg Heerde, head of Americas analytics, reinsurance solutions at Aon PLC. “There will be pressure on pricing. When supply is down and demand is up, that generally pushes up the price curves.”

Reinsurers have been in a loss-making position for more than five years, Hamm said. “Because of that, our capital has become more expensive and at the same time we have to increase the return on our capital,” she said.

While Ian is clearly a major property loss for the industry, people are thinking about the potential knock-on effects of shrinking capital, Wolfe said.

“You’re not immune if you write multiple industries from having to make decisions about how to allocate that capital differently. Even this hurricane is going to put pressure on some of the U.S. casualty industries,” he says.

Flexible approach

Cedors should come to the table armed with data and be prepared to consider alternatives, Hamm said. “I would advise customers to be flexible and have back-up plans for how they could adapt if the price is too high or the capacity is not available,” she said.

Buyers must demonstrate that they are in control of their portfolio and how they manage estimates of inflation losses, Mr. Lawrence. “Clients need to think about the construction of their panel and potential opportunities for relationship expansion, while being aware of the reinsurers potentially looking to fold,” he said.

Retentions will rise, Mr. Wolfe. “If you need more border at the top of your property program, we’re probably going to have to reposition the border at the bottom of the program,” he said.

Swiss Re has seen two early renewals of significant catastrophe placements where cedants chose to raise retentions to take some stress off the price of the upper tiers, Wolfe said. “For almost every client in our portfolio, it has to be a serious consideration,” he said.

Buyers may need to adjust their thinking and agree to partial placements, Mr. Coleman. Buyers can then build on it as opposed to viewing it as a failure, he said.

More medium-term placements are likely as buyers look for other ways to get additional coverage, Mr. Coleman.


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