Author: Josh Knapp
Ahead of the 1.1.2024 reinsurance renewals, reinsurers’ overall appetite for US regional property catastrophe (Cat) coverage remains healthy, but carriers are proving less willing to provide aggregate covers for regional property Cat risk, preferring instead to deploy capital through occurrence excess of loss (XOL) programs.
Gallagher Re conducted a market survey with various reinsurance partners focusing on regional personal and small commercial business. The survey aimed to ask questions related to pricing and portfolio appetite, capacity expectations and structure considerations for various reinsurance programs.
Property catastrophe capacity is likely to remain flat
The poll, which surveyed 24 of the reinsurers most active in the regional market in fall 2023, found the overall dollar amount of capacity to be deployed in property Cat coverage for these insureds was likely to remain flat at January 1, 2024.
The findings are significant, as half of respondents said that from 40% to 60% of their US book renews at 1.1. And for 59% of reinsurer respondents, regional clients made up at least 40% of their 1.1 renewals.
The survey found that 58% of reinsurers planned to write the same amount of Property exposure as last year through similar levels of participation in insurers’ Cat programs, with 38% planning for modest growth.
The survey also found that property Cat capacity will more likely be deployed in excess layers than aggregates. In 2022, the same survey found 37% of reinsurers were unwilling to write aggregate covers. This year, that percentage jumped to 63%.
This increase follows a challenging insurance renewal in January 2023, during which reinsurers made less capacity available for working layers and aggregate covers, amid fundamental shifts in pricing and increases to attachment levels.
By contrast, there are now signs that reinsurers are beginning to lean into this market in a more meaningful but selective way. Reinsurers’ desire to shift capacity further up the programs to more remote layers will result in ample capacity at these levels, which could result in a reduction in pressure on rates. The challenge for 1.1, therefore, is to balance this dynamic with reinsurers being willing to support programs across the board.
This balance may be achieved in part through more sophisticated program design. Within the almost two-thirds of carriers that said they wouldn't write aggregate policies, a quarter said they would consider providing subsequent-event XOL reinsurance coverage instead. This number was a slight uptick in appetite compared to last year when just 17% of respondents said the same.
The survey was conducted against the backdrop of another significant year of losses from adverse weather events in the US. The first nine months of 2023 saw insured losses from severe convective storms crossing the USD50 billion threshold for the first time on record, according to Gallagher Re analysis. The North Atlantic hurricane season still has a few weeks to run, and if another big loss event happens, reinsurers’ positioning might change.
For the time being, there are some early signs of rate expectations being moderated for stronger performing portfolios, when compared with the prior year. Reinsurers are expected to rely less on mandated, across-the-board rate increases this year, and focus more on the client-specific underwriting experience, with an emphasis on loss experience in 2023.
For loss-free property Cat XOL exposures, 84% of our respondents said they expected pricing to increase less than 20%, with 46% indicating less than 10% increases. A small number even reported they expected prices to drop by up to 5%.
This outlook for buyers is better than last year, when a fifth of reinsurers looked for a more than 20% price lift, and no carriers expected a drop in rates.
Meanwhile, for portfolios that have been impacted by losses, 68% of respondents expected a price increase of 10% to 30%.
Per risk coverage: Moderated rate expectations
The survey found similar moderated rate expectations for per risk coverage: loss-free accounts were expected to generate rate increases of flat to 10% in 2024, according to 49% of respondents, up from just 27% of reinsurers the year before. Last year’s survey found the majority of reinsurers pushed for 10-20% rate hikes for loss-free accounts.
Reinsurers are expected to place significant weight on historical experience when evaluating retention levels and pricing, specifically when considering whether the retentions agreed at 1.1.23 proved adequate, or if further corrections are needed.
Carriers should expect reinsurers to push for retention increases in some cases. The survey found that 78% of respondents indicated that greater than 10% of their portfolios will require retention increases, with 39% indicating that they will be pushing for retention increases on at least 20% of their portfolio. At a minimum, reinsurers will be looking to keep retentions on pace with exposure change and inflation.
For more information on the full survey results, please contact one of our team members.