Natural catastrophe (Nat Cat) risks have pushed Property insurance into the most challenging market in three decades.

Author: Mark Hubbard


All large renewals now tend to occur between March 1 and July 1, while European risks tend to be renewed in January. There had been concern in the market that capacity would run out, yet this only happened in very limited pockets — but will this change? Overall capacity has remained available, but at increased pricing and attachment levels.

At all levels of the insurance value chain — insurers, reinsurers and retrocessionaires — there's been a movement away from attrition and a reassessment of risk. For reinsurers, the current hard market has been driven by their inability to generate sufficient returns — with increased frequency of both primary and secondary perils a significant driver of their losses.

The tradition of bucketing perils into primary and secondary silos is becoming increasingly meaningless. The cumulative wealth of examples where individual secondary peril events have led to primary-level losses provides an ever-strengthening argument that any peril can lead to extensive losses.

Insurers writing secondary perils used to be safe in the knowledge that reinsurance would cover any losses. However, the increases in reinsurance attachment points (once the loss exceeds this amount the reinsurer will step in and pay the excess) that have become the market norm since January 1, 2023 have left insurers with even higher net retention levels and led them to question whether these risks are insurable.

Results from the first half of 2023 indicate that Cat losses hit insurers harder in the first half of 2023 than the half of 2022, as they retain more losses. With ongoing concerns about secondary perils and inflation, this reinsurance market dynamic is unlikely to change in the foreseeable future.

However, the actions of US insurers demonstrate that they aren't in a position to accept any more risk without something changing. This issue isn't isolated to North America, and the measures being taken here will likely pave the way for other regions that are vulnerable to Nat Cat.

The challenging environment for US domestic insurers in both the admitted market and the excess and surplus (E&S) market is providing more opportunity for the London and International markets, where there's been significant premium growth and client expansion.

"With the ever-increasing losses each year from catastrophic losses (regardless of whether those losses are deemed to be primary or secondary perils) and impacted further by climate change and inflation, it is imperative that, as brokers, we continue to have access to A-rated insurers who continue to be willingly and able to offer sustainable, affordable and relevant products and the necessary aggregate capacity to satisfy both our clients’ short, medium and long-term insurance requirements.”

Mark Hubbard, Managing Director, Property, Gallagher Specialty

Where is the appetite?

Cat-exposed treaty reinsurance hasn’t performed well since 2017, and many insurance carriers are also questioning the performance of their binder portfolios. Consequently, within the London market, there has been a reallocation of capacity, moving from the binding authority/MGA market and treaty to the open direct and facultative (D&F) market, giving insurers more control over underwriting and data provision. By way of example, Blenheim, Kiln and Apollo have withdrawn from treaty insurance and expanded their property D&F portfolios*.

Nevertheless, the D&F market is hardening due to reinsurance and excess demand. Deductibles are increasing, and there's a move toward insurers pushing for per-location deductibles to manage some specific secondary perils. This push could lead to insureds living in areas exposed to extreme weather paying more before their insurance policy starts to cover the loss. As mentioned above, these higher frequency/lower cost events are often aggregating at higher totals.

Florida and California are experiencing significant rate changes and have witnessed an increase in self-insurance. Where wildfire has been excluded as a peril from property policies, it's been very challenging to place. The international market isn't as capacity-constrained, but there's been upward pressure on pricing, retention and deductible levels.

After a fairly quiet windstorm season, Hurricane Otis losses could be one of the costliest events in Mexico’s history, with the market bracing itself for a multi-billion dollar loss. Will captive utilisation continue to increase or will capital return to the market? If the latter, will it just be via reinsurance or will it be in the specialty insurance arena, which is possibly less volatile than treaty?

There are signs that capital is being attracted to the market — but it will need to gain confidence in the long-term profitability of the market and that insurers and reinsurers have an understanding of the risk they're assuming. It remains to be seen whether capital will enter through treaty reinsurance, or whether carriers would prefer to retain underwriting control and re-enter from an MGA or syndicate/D&F perspective.

These questions have undoubtedly been talking points amongst reinsurers and insurers, yet the answers will only become clear once this windstorm season's dust settles. Nevertheless, one question can be answered now. The insurance market will continue to evolve and innovate, and areas prone to extreme weather will remain insurable in the long term. The insurance market depends upon volatility; without it, it has no business model. The increase in severe weather has undoubtedly stretched the current boundaries of the insurance value chain to the limit, prompting a reset so that all levels can regain confidence that they will be adequately compensated and show they can sufficiently understand the volatility they're accepting.

To learn how Nat Cat events in different parts of the world are shaping the future of insurance, read the seven-part report, How Is the Increasing Risk of Extreme Weather Changing Insurance?


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