Demand from cedants up but reinsurers have the appetite

Changes to the risk models from two of the major vendors, combined with inflation and rising exposures, are driving additional demand for property-cat reinsurance from buyers. But reinsurers have the capacity to service this, making for a healthy and balanced market in the run up to the year-end renewal.

That is the view of Randy Fuller, North America Property Centre of Excellence and Florida Segment leader, Guy Carpenter. He described the market as healthy and poised for growth, estimating that reinsurers’ capital has appreciated by some $50 billion this year. He notes that as much as $6 billion of new capacity has entered through already established platforms—and reinsurance startups are waiting in the wings.

“We are seeing a pretty strong growth appetite from reinsurers but also strong demand from clients,” he told APCIA Today.

“We are seeing clients starting to top up covers.”

He said some of the demand is caused by inflation and increased exposures on insurers’ books that might have developed over the last few years but not been previously covered. 

“Clients might have had some exposure growth, but in the hardest part of the market, they weren’t able to afford the additional limit. Now the market’s settling down, we are seeing clients starting to top up covers,” Fuller said.

“Then there is some impact from changes to risk models. Two of the risk model vendors have made updates and those are having an upward pressure on demand.”

In the context of something of an equilibrium, he expects a further settling of pricing and terms of conditions. He said that some deals may have been overcorrected in the hard market. “Market conditions are going to be more in favour of the buyers than has been the case in the past couple of years,” he said.

Low profile capital

On the capital flowing into the market, Fuller notes it has been more low profile than in previous hard markets because of the lack of pure startups. “Capital has been raised into existing platforms, which means it’s not publicly announced. 

“You should not downplay the significance of that. If it had been raised via new reinsurance startups, it would make headlines.

“But capital is certainly entering the space. That said, there are a number of pure startups in the wings. Some are getting pretty close to the finish line on their capital raise—one could even launch before year-end. But there’s not a desperate need for new capital in order to have a healthy marketplace.”

A big hurricane loss could move the market, but Fuller believes the market is much more resilient now, having been through such a fundamental correction in recent years.

“It just depends on how bad the loss is. This hard market was swift, short, and steep, but very productive in the sense that we’ve reached a level where retentions have increased significantly. Pricing has also increased.

“The dynamic is very different from two or three years ago. The bar is raised in terms of what level of loss might cause a market shift. Something like Hurricane Helene, although it’s a major event, is going to have a limited impact on the reinsurance industry. 

“You can never rule out something else happening but given where we’re at right now, I don’t see there being any issues.

“The intent of the hard market reset was to bring the market to a sustainable level going forward. The focus now will be on making sure that pricing does remain technically sound.”

Storm problems

Another indicator that the dynamic is healthy between reinsurers and cedants is a collective willingness to solve problems. One of the biggest at the moment is how to deal with exposures stemming from severe convective storms (SCS).

Fuller describes this as the “most challenging peril right now”. He said Guy Carpenter is working on a range of initiatives with clients and reinsurers to find solutions.

“This hard market was swift, short, and steep, but very productive.”

“The good thing is that we are seeing reinsurers become more interested in working with us to find creative solutions,” he said. “We are seeing innovative solutions but even on the traditional side, we’re seeing more appetite for SCS risk, which is positive. The whole SCS market has evolved. Good progress has been made.”

As segment leader for Florida, he commented on the dynamics in that market. He said a raft of regulatory changes made two years ago have transformed the market, which was once one of the most challenging in the whole of the US for insurers.

“It has been transformational. We continue to see litigation rates declining. We have seen hurricanes make landfall in Florida but they haven’t produced a great level of losses. In the past, those same events would have become an industry loss due to the dysfunction on the litigation side.

“We are seeing insurers’ loss ratios drop meaningfully. After almost 10 years of losing money, losing capital, we’re starting to see capital appreciation. Equally, reinsurers have returned and are now comfortable writing business in the state.”

He agrees that regulatory changes made in Florida could offer a template for other states that are challenging for insurers, such as California. “However, although the solution has been extremely effective in Florida, getting to it was very painful.

“Ideally, you would not need such a crisis before changes are made. But what tends to happen is the problem gets so bad there’s no other option. So when it comes to other states, there could be a lot more pain to come before they decide to make meaningful change,” he concluded. 

For more news from the American Property Casualty Insurance Association (APCIA) click here.

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