Loss-hit carriers may see 25% hikes in US: head underwriter at Pioneer CAT

US carriers hit by losses in recent years could be looking at rate increases of between 15 and 25 percent and all carriers will probably have to absorb rate increases of between 3 and 5 percent, David Carson, head underwriter at Pioneer Cat, a London-based managing general agent, told APCIA Today.

Around 75 percent of Pioneer Cat’s book is US property cat risk, both excess-of-loss and proportional treaty; the other 25 percent is cat business in Japan.

Carson said he is more confident that rate increases will occur than he has been for many years, thanks to the accumulation of a number of losses and other pressures the market has faced in recent years.

As well as absorbing two years of windstorm losses, the market has been hit by a number of unexpected perils including wildfires two years in a row, while insurance-linked securities (ILS) investors have grappled with challenges they had not previously faced, including significant loss creep and trapped capital.

“This time last year people were talking about rates being flat, but since then we have seen more losses from wildfires, a lot of negative publicity in the ILS sector, including the loss of Markel CatCo, and ongoing deterioration from Hurricane Irma and Typhoon Jebi,” Carson said.

“All those factors have combined, and they help push rates up. We feel there is some real momentum heading into January 1, with some small increases on loss-free covers and much more on loss-affected books of business.”

Despite this, Carson is realistic. He said there remains an abundance of capacity chasing catastrophe risk and this means there is a limit to how high rates can go. He notes that in the recent Japan renewals, a lot more earthquake coverage was purchased—but rates remained flat.

“This is indicative of how much capacity is out there, and it is probably worse in the US,” he said.

That said, he accepts that if carriers’ results are poor for a long period of time and reserves are becoming clearly depleted, there could be a retrenchment from some of the bigger players.

“Things could change more if we have another series of losses in the fourth quarter,” he said.

The way the market reacts to losses has become increasingly specific to a region, line of business or even specific cedants in recent years as opposed to rates moving globally in the aftermath of losses.

Carson admits this is counterintuitive to the notion that reinsurance is a global industry with the premiums of the many covering the losses of the few.

Specifically, he said, this means that the recent typhoon losses in Japan may not have an impact on the US cat market.

“In the old days, losses did have wider ripple effects. Now, that is not the case. There is too much capacity chasing business in the US for these events to make much of a difference.”

He added that an additional talking point at the APCIA conference in Boston will be how the industry better understands risks it previously regarded as secondary perils such as wildfire.

“The cat market does have a tendency to be caught by perils it was not expecting—and we have seen wildfires two years in a row,” he said.

“That will mean some programmes will be restructured, and people will also look to see how the modelling companies respond.”