Reinsurance hardening to stay firm in 2024 but with softer price bumps
Amid growing investor concerns over rising nat cat losses, the reinsurance market appears to be shifting back to its pre-soft market state of providing capital protection for cedents, rather than earnings protection, according to Fitch Ratings. The hardening trend in the market is predicted to continue into 2024, albeit with “more moderate” price hikes than seen in 2023.
Global reinsurers are significantly reducing their coverage for medium-sized natural catastrophe risks amid investor pressure over mounting losses and the lure of better profitability elsewhere.
"Some companies were already retreating from the property-casualty market in 2022 but even the strongest reinsurers have now pulled back, largely through tightening their terms and conditions to limit their aggregate covers and low layers of natural catastrophe protection," said Fitch. "This leaves primary insurers much less protected against secondary peril events."
Natural catastrophe business has become largely loss-making in recent years as prices have failed to keep pace with increasingly frequent, severe and volatile weather-related losses due to climate change. This has reduced reinsurers’ appetite to provide natural catastrophe cover, particularly as other business lines are now benefitting from price rises that are higher than claims inflation, analysts noted.
Tighter terms and conditions for natural catastrophe cover are a structural improvement that should benefit reinsurers’ risk profiles in the medium term as they are unlikely to be quickly reversed even when market conditions change, it added.
In the first half of 2023, global insured costs from nat cats reached $53 billion, marking a 47% increase from the two-decade average, according to Aon. Yet, the 18 non-life reinsurers tracked by Fitch showcased robust profitability during this period, recording a combined ratio of 88% for claims and expenses versus premiums (down from 89.4% in 1H22). This was driven by the above-claims-inflation price increases in many business lines, as well as the lower natural catastrophe burden as cedents retained more of the losses themselves, Fitch said. Natural disasters contributed a moderate 6.7 percentage points to the overall ratio.
Reinsurance price momentum continued during the June and July 2023 renewals. US property-catastrophe markets had the largest price rises, with 30%-75% increases for loss-hit business and 10%-40% for loss-free business. In contrast, premium rates for casualty lines were broadly stable, reflecting the greater capacity allocated to them.
Fitch expects reinsurers to maintain strong underwriting discipline despite higher interest rates and for reinsurance market hardening to persist into 2024. However, price increases are likely to be more moderate than in 2023 as rate adequacy has generally been reached through several rounds of hardening since 2018.
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