Analysts at Keefe, Bruyette & Woods (KBW) are the second group to say that the returns generated from catastrophe reinsurance risk underwriting and capital allocation can remain strong, just as long as the industry stays disciplined on attachments, terms and conditions.
It’s taken some time for it to develop into clearer that the true driver of the last two years of catastrophe reinsurance profitability has been the elevated attachment points and stricter terms installed, not only the upper pricing achieved.
Actually, the catastrophe bond market is a working example here, where recent tightening of spreads and yields has not been as negatively received as one would have seen a number of years ago.
The rationale being, that the insurance-linked securities (ILS) investor community is comfortable with the extent within the reinsurance tower where cat bonds currently sit, because the instrument has now moved away from frequency and back to the height catastrophe peril coverage it had originally been designed for.
For traditional reinsurance firms the identical holds true, with those operating at higher-layers more accepting of declining rates-on-line on the January 2025 renewals, as some price is given back while the T&C’s of coverage remain largely sticky.
KBW’s analyst team said, on all-important underwriting margins, “We expect sustained strong catastrophe reinsurance profitability, mostly reflecting stable terms and conditions, dampened by overall rate decreases.
“Quota share-focused casualty reinsurance profitability should improve given earned premium (i.e., rate and exposure unit) growth and a few ceding commission decreases.”
Declining reinsurance costs will read across to raised profitability for primary insurers as well, which is maybe making them more comfortable on the considered one other yr of elevated retentions.
After all, the key here is to find the right-balance, between retention and cession, to enable each primary and reinsurance tiers of the market to sustain profits in average catastrophe loss years, while still having responsive protection in-place for those years where elevated catastrophe losses eat into or erode profits.
Catastrophe loss ratios, for primary P&C carriers, will not be expected to vary, given “unchanging reinsurance attachment points and still-high secondary peril frequencies,” but lower reinsurance costs will definitely help the first side of the marketplace and ease some pressure seen in recent times, KBW explained.
Florida could also be an outlier on reinsurance price, given hurricane and storm losses, although evidence from recent Florida focused catastrophe bonds suggests there is perhaps some softening here as well.
KBW’s analysts said, “We expect modest rate decreases through the January 2025 reinsurance renewals but modest increases through the Florida-heavy (and hence more loss-impacted) June 2025 renewals.”
Adding to the possibility of a more profitable primary sector are underwriting actions implemented within the last two years, which can begin to flow to the bottom-line more evidently.
On the property catastrophe reinsurance equilibrium, KBW’s analysts state, “The upper property catastrophe reinsurance attachment points implemented in 2023 created a transparent divergence in underwriting results, with primary insurers bearing a lot of the last two years’ catastrophe losses while reinsurers’ results have improved markedly. We imagine the growing frequency of billion-dollar convective storms (which accounted for about 75% of worldwide insured natural catastrophe losses in 1H24 and 59% in 2023, based on Aon’s September 2024 “Ultimate Guide to the Reinsurance Renewal” report) validates the reinsurers’ decision to limit their exposure to secondary (i.e., aside from hurricane and earthquake) perils, and we don’t expect the reinsurers to compromise on that change even when rates decline somewhat.”
Assuming a fairly normalised catastrophe loss experience in 2025, KBW’s analysts say, “we expect reinsurers to generate solid returns in 2025.”
But, while price is seen as more necessary than attachments and terms, in defining the probability of reinsurance remaining profitable, there can be a limit and the market might want to wait and see how the load of capital builds and what effect it has on rates over the subsequent yr.