Milton could render Paradise Lost: Beazley

The US property-cat reinsurance market remains so fragile, with only one good year of profit under its belt, that a major event like Hurricane Milton could easily render Paradise Lost, Mark Vaughan, deputy head of treaty at Beazley, told APCIA Today.

“If Milton delivers a double-digit billion loss, prices will react,” Vaughan said. He thinks capacity would be trapped as well, which would lead to an increase in pricing. 

The property-cat reinsurance market was looking more unstable than widely acknowledged long before Milton formed in the southwest Gulf of Mexico and started moving eastward, possibly to Florida’s high value tri-city area. 

“It is amazing that we still haven’t seen a new class of reinsurers.”

“Already the balance was quite fragile in the sense that there is a huge amount of investor uncertainty about climate,” Vaughan said. He sees “a lot of fear from investors” from an outside-the-box hurricane season and a continued increase in severity from severe convective storm, as well as flood events, in the US and in Europe. 

Investor fear is clearly visible in the marginal market capacity. Retained earnings and a bounceback in mark-to-market investments helped traditional reinsurers keep up with demand—but new capacity has been limited, Vaughan said. 

“It is amazing that we still haven’t seen a new class of reinsurers created in 2024: that speaks to the fragility of the investors in the cat space.”

That said, reinsurers need to consider the pace of demand. “There is still a lot of demand out there; it’s something we are not talking about so much,” Vaughan said. “Brokers have been talking so much about the oversupply, but they are not talking very much about the additional demand we are going to need in 2025.”

Stack the towers

Catastrophic model changes from RMS and AIR plus lingering effects of the not-so-distant inflation spike ensure cedants should be stacking their towers ever higher.  

“Demand will continue to be very strong in 2025,” Vaughan said, citing a good chance at demand growth in the neighbourhood of 10 to 20 percent from cedants for total US property-cat. 

Traditional reinsurer capital may have grown handily on the bond market rebound and with a strong dose of retained earnings but need not keep pace in all circumstances. 

“It will be balanced out somewhat by the strength of traditional reinsurers and retained earnings,” Vaughan said. “But after Helene and with Milton on the doorstep, this could ruin the balance.” 

Investors might be a bit more forgiving if 2024 was the fourth or fifth year of an enduring hard market.

“We’ve had only one or two good years balanced against five or six bad years before that,” Vaughan laments of a track record falling below what investors might say certifies sustainability. “I don’t think investor confidence is at all-time highs.”

It’s true for Beazley as well. Vaughan is “happy with the pricing we are seeing” but “would like to see that sort of pricing level sustained over a longer period of time to give some returns back to investors”.

He added: “The problem with property is that hard markets have been short and soft markets very long—and that is not a good message for investors.”

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