Mid-year renewal cat rates trail 1/1 prices

Mid-year catastrophe reinsurance renewal rate increases are lagging January 1 hikes, notwithstanding mid-year's higher prevalence of loss-impacted accounts and hurricane Irma's continuing modest loss "creep," according to KBW.

This is the conclusion of KBW analysts after a number of investor visits with Bermudian insurers, reinsurers and brokers.

Loss estimates for Hurricane Irma have been drifting upward, in part due to rising loss adjustment expenses stemming from demand surge (2017's multiple events drove contractor day rates up to $1,000 from the more typical $400 rate), creating some uncertainty about ultimate losses that could pose a short- term headwind for some insurance-linked securities (ILS) funds, according to KBW.

The analysts noted that some industry loss warranties (ILWs) are triggered when PCS loss estimates exceed a particular threshold, but don’t actually pay out until PCS finalizes its estimates, which could take up to three years.

In addition, Florida's characteristically litigious environment means that hurricane Irma claims have a higher probability of ending up in court, boosting incurred but not reported (IBNR) estimates to reflect both attorneys’ fees and a longer claims tail.

Nevertheless, most reinsurers reported that mid-year reinsurance renewal rate increases are smaller than rate increases were at the January 1 renewals, according to KBW. Loss-impacted accounts are renewing with rates flat to up 5 percent (more heavily loss-impacted Caribbean accounts are renewing with bigger increases) while loss-free layers' renewal rates are flat to down 5 percent. Loss-affected retrocessional rates are up 7-12 percent on a risk-adjusted basis (also below January's 15-17 percent increases), and are also flat for loss-free accounts.

The consensus is that significant third-party capital (more a function of new funds than of unlocked collateral) still dominates the market, and – despite some speculation about whether this capital can withstand another year of significant catastrophe losses – KBW analysts think that this capital is best viewed as a permanent feature of the reinsurance landscape, and that the asset class will persist even if individual investors or sums pull out of the market.

Similar to property catastrophe reinsurance, aviation rates remain challenged. KBW analysts noted that one reinsurer said rates needed to double to be adequate. Energy rates are rising modestly along with increasing demand itself due at least in part to rising energy prices. Modest casualty and specialty lines reinsurance rate increases in response to poor profitability also appear to be sticking, despite concerns that fading catastrophe rate increases will push more capital toward other reinsurance lines, the report states.

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