Ian-driven rate hikes unlikely to lure more property-cat capacity into market: Beazley

Even a further spike in rates driven by losses from Hurricane Ian is unlikely to be enough to tempt meaningful levels of new capacity into the property-cat reinsurance space, heralding a market comparable with the post-Hurricane Andrew period in 1993.

That is the view of Mark Vaughan, deputy head of treaty reinsurance at Beazley. While he acknowledges that some carriers, including Beazley, might be tempted to commit a little more capacity, uncertainty around climate change, inflation and the five-year loss record in the cat space will largely outweigh the temptation to commit more.

He stresses that the industry needs significant structural change in price and terms across all markets for confidence to flow back—rate increases alone post-Ian are not enough to bridge the gap.

“There are small pockets among reinsurers that could increase by a small margin,” Vaughan told Intelligent Insurer. “But it is hard to see anyone walking in and significantly increasing capacity.”

This means a change in dynamic in the market. He predicts that many cedants will end up doing private deals with reinsurers to secure the treaty capacity they need for the 1/1 renewal, outside of any form of open bidding.

The same thing happened in the mid-year renewal when, he says, a “huge proportion” of deals were done privately. Vaughan expects that 1/1 will bring “many more private placements to allow cedants to get their placements finished”.

“The upshot: higher, uneven pricing on a volatile market. That will become almost endemic in 2023,” Vaughan says.

The dwindling supply of capacity in the market has come just as demand has surged, in the range of double-digit billions, he suggests, on the impact of inflation on insured values. The supply-demand has become very one-sided with little prosect of this changing any time soon. “It’s very difficult to see where such an increase in capacity is going to come from,” he said.

Losses stemming from Hurricane Ian are likely to trigger a further uplift in rates going into the 1/1 renewal. But the more palpable result could be to reinforce the thinking that has driven many reinsurers to rebalance their books away from property-cat business as they seek less volatility and great stability in their earnings.

In the most severe cases, reinsurers such as Axis Capital have dropped property altogether. Comments made by Albert Benchimol, president and CEO of AXIS Capital in June, following that announcement, perhaps sum up the concerns of reinsurers. “The decision to close our property reinsurance business was not taken lightly and was driven by the significant and increasing effects of climate change and the challenges faced by the catastrophe reinsurance market,” he said.

Those comments are perhaps even more striking given that they were made well before Hurricane Ian, now tipped to become one of the costliest US hurricanes ever. While insured loss estimates are still evolving, the consensus now seems to be that the storm will cost the industry at least $50 billion, and potentially much more.

Trends worsening

Vaughan says that the storm will inevitably push up rates. But it also confirms the fears of many players that the loss trends in this space are worsening to the point carriers are wary of committing any more capacity, regardless of rates.

“Hurricane Ian speaks more to the five-year loss trend, let’s call it six years now, than it adds to the rate enticement story,” Vaughan said. “Post-Ian we are likely to see a market which resembles more closely post-Andrew in 1993.”

Hurricane Andrew represented “the hardest market we’ve ever seen” and capacity fell well short of demand in that period. “Programmes couldn’t get done at almost any price,” Vaughan recalled.

That said, there will be carriers willing to relook at the space to a limited degree—and Beazley is one. Vaughan admits it could be tempted to increase its current property treaty business, if the price is right, where it has been underweight for the better part of a low-margin decade.

But there is context to that. Property treaty makes up less than 5 percent of the Beazley book, Vaughan said, calling the level “quite small” compared to that of rivals.

“We’ve always wanted a bigger, better-sized treaty, but that hasn’t been possible on the returns in the treaty space in the last decade,” he explained.

“Everyone, including us, will be cautious. They’ll take the rate as opposed to increasing the exposure.”

This means that structural changes in the market around retentions and sources of capacity may prove more substantial mid-term than any immediate acceleration in rate momentum or erosion of 2022 capacity.

Retentions may finally break out of long-lasting stagnation from a bygone era of little to no inflation, Vaughan says. Treaty players might now sharpen their focus on single named perils to “avoid all catch-all formulas like those now being offered and narrow it down to what we price for”.

Cedants may continue to be roped into greater co-participation across all elements of reinsurance towers, he adds. “They have to have sufficient skin in the game.”