Property catastrophe reinsurance market conditions reach peak, presenting advantageous prospects for reinsurers, according to JMP Securities’ analysis.
Assuming a season with minimal to moderate catastrophe losses, reinsurance Return on Equity (ROE) is expected to be robust. Experts find it unlikely that reinsurers would significantly increase pricing in the next renewal cycle, given the potential economic strain it would place on Florida domestic carriers and the potential challenges it could pose to risk transfer, particularly for lower layers.
Contract terms, such as named storm provisions and the prevalence of 7-month Insurance-Linked Securities (ILS) covers, have already been tightened considerably, making further reductions unlikely. However, a substantial decrease in pricing is also not foreseen, as reinsurers have recognised the need for sustainable returns, and a single positive year does not compensate for several years of losses.
Should the industry achieve a 15-20% ROE for the year, it is projected to generate over $50 billion in capital, significantly contributing to replenishing the deficits caused by mark-to-market losses and catastrophes in 2022.
While some January 1 renewals did not witness increased inflation-driven limits, likely due to limited capacity, companies may opt to do so once capacity returns. Additionally, as the June 1 renewal approaches, many organisations are expected to seek additional lower-layer private coverage for 2024, as they saved the use of the Reinsurer Aggregate Protection (RAP) layer for this year.
Despite the positive outlook for reinsurers, industry experts believe that the primary property market may offer even more growth potential. As the impact of higher reinsurance pricing and inflation trickles down, it is anticipated to influence the more regulated primary marketplace.
The recent survey conducted by the Council of Insurance Agents & Brokers (CIAB) further supports this notion. The survey revealed a substantial surge of 20% in property premiums during the first quarter of 2023, marking the highest level since 2001. Moreover, 85% of respondents reported a decrease in underwriting capacity for commercial property, with half of them characterising it as significant.
This news bodes well for companies exposed to the primary property market, including notable entities such as Skyward Specialty, Palomar Specialty, and RLI Corp.
