NEWS
2023 reset can’t be undone, certainly not on deductibles
The changes that occurred in the 2023 renewal will not be easily or quickly undone, say analysts at Moody’s.
There’s no going back on the 2023 reinsurance reset, leaving primary insurance cedants with no choice but to adapt to a world without aggregate covers or frequency-buffering lower layers. But it is not an easy transition for everyone.
That was how analysts at Moody’s described the state of play heading to the 1/1 renewals, when speaking to Baden-Baden Today. “The new balance between primary insurers and reinsurers is the new normal, at least at the current stage of the cycle,” said Christian Badorff, Moody’s senior credit officer with a view chiefly to European reinsurers and select European primaries.
The hike in retentions was probably the single most crucial element of the 2023 property-cat reset, even if mid-double-digit rate hikes stole a lot of the headlines, the Moody’s analysts claim.
“The hike in retentions looks longer-lasting and even if pricing were to soften, it’s hard to see those terms and conditions softening,” said Laline Carvalho-Neff, Moody’s VP and senior analyst, with an eye directed more towards US Names.
“There seems to be very low appetite to go back to that type of coverage,” she said of frequency layers and aggregates.
But that fundamental move away from lower layers need not worsen further for primaries in the coming renewals, Carvalho-Neff suggested. Reinsurers moved up “very dramatically” in towers in 2023 and, despite the continuing damage from inflation to insured values, “for a period of time, reinsurers are fairly insulated from those frequency losses”.
“The hike in retentions looks longer-lasting.”
Laline Carvalho-Neff
Moody’s did a before and after study on the evolution of gross to net probable maximum loss (PML) coverage among European primaries between 2022 and 2023 and found that on average, the decrease in reinsurance coverage came at the frequency levels.
“In the higher return periods, when things get really bad, the protection, the net to gross hasn’t deteriorated at all; they maintain the level of protection they had in 2022 going into 2023,” Badorff said.
“Their capital in extreme events is going to be protected,” he said. “For smaller nat cat events, the primaries will take the bigger hit.”
An interesting dynamic
That story appears to have found its proof in US H1 financial results. Record-breaking nat cat losses caused by severe convective storms didn’t trigger much by way of reinsurance payments, but left select US primaries with some big underwriting losses.
“It is an interesting dynamic that we are watching,” Carvalho-Neff said, citing those losses, the primary market’s scramble for more rate from policyholders and the spate of coverage reductions in key jurisdictions.
“The industry as a whole should be able to withstand the higher volatility,” she said, but across the board, “you have to change the business”. The good old days of underwriting on a gross basis and unloading portions on reinsurers are clearly over.
But the industry as a whole may not mean all of its component members. “Some of the smaller players in the regions might have more trouble, and weakly capitalised small companies with lower capital might have a harder time,” Carvalho-Neff said.
“For smaller nat cat events, the primaries will take the bigger hit.”
Christian Badorff
“Any number of larger players with the larger balance sheets, even those revealing the deepest first half underwriting losses, should have the wherewithal to undergo the transition,” she added.
But the pinch between reinsurance costs and the new volatility on one side, and the lag in primary pricing on the other, is real.
“We believe insurers in many cases are not able to push through the necessary price increases, particularly in retail lines of business,” Badorff said to explain Moody’s negative outlook on the bulk of European P&C carriers.
Cedants know the score. A Moody’s survey of reinsurance buyers in primary insurers showed a “vast majority” expecting rate gains to continue, with continued heightened inflation readings taking the lead among factors to blame. But most cedants will continue to avoid increased reinsurance buying, the survey indicated, saddling themselves with greater net exposure. Budgets will hold the line.
Lessons may go to policymakers as much as to underwriters, Moody’s analysts clearly suggest—don’t take the Florida path to a market built on small local players, a path on which California and perhaps others can be said to have taken some clear steps.
As for the reinsurers, many have achieved a long-lost level of viability which they will not hand back easily. Reinsurer financial results in the first half of 2023 look “very promising” Badorff said, with a “significant strengthening in underwriting performance” among his European reinsurance coverage universe.
“Risks remain and just one half-year doesn’t turn this whole history around,” he concluded. “It is not as though we believe everything is perfect.”
Main image: Shutterstock / twintyre