NEWS
Risk has shifted from reinsurers to primaries: Moody’s
Further reinsurance pricing gains might still be squeezed out of an increasingly tight market.
Reinsurers have succeeded in pulling away from frequency risks and settling into higher layers of reinsurance coverage, presumably putting paid to a long-running era of weak returns in contrast with primary insurers, analysts at Moody’s believe. But further reinsurance pricing gains might still be squeezed out of an increasingly tight market.
“I would say that the industry has been fairly successful in terms of pushing themselves higher up in the programmes to cover truly large cat events and get out of frequency losses,” Laline Carvalho-Neff, Moody’s senior analyst in global reinsurance, said in the run-up to the Monte Carlo Rendez-Vous.
It may have done the trick. The sum of natural catastrophe events in the first half of 2023 might be the second-highest since 2011 from an insured loss perspective, but reinsurers are finding the impact “fairly benign” on their underwriting results, Carvalho-Neff told a pre-event webinar speaking in the context of the industry’s H1 financial results.
Secondary perils, most notably North American convective storms, have been delivering a “fairly substantial” portion of total losses but “more and more of those secondary perils will be left with the primaries”.
Many of those perils have been avoided not only by the rise in attachment points, also because of the “elimination of most aggregate covers” and changes in terms and conditions in most treaty renewals to date in 2023. “It’s a significant change,” Carvalho-Neff said.
Just how far the pendulum has swung in terms of return on capital has yet to be seen in full. H1 2023 looks promising, but “it is a little early to know”.
Moody’s has tallied up some numbers on the European market. On average, it estimates that primary carriers have increased their loss exposures by 10 to 15 percent. This could represent 1 to 2 points on the combined ratio, Antonello Aquino, Moody’s managing director and co-head for Europe, suggests.
“All forms of new capital look relatively limited.”
Laline Carvalho-Neff, Moody’s
“That doesn’t sound like a lot, but for just one year, it’s quite significant,” he said. “We have seen a shift of risk from reinsurers to primaries.”
The US market, in contrast, is seeing a very different trend. Primary carriers are showing notable technical losses in key lines such as homeowners and automotive with a heavy impact from natural catastrophe events. These challenges have been compounded by the lingering slow pace of regulatory pricing approvals, Marc Pinto, Moody’s managing director for financial institutions, noted.
Given the favourable conditions reinsurers are enjoying, Carvalho-Neff believes traditional reinsurers could put additional capacity if they chose. Current capital levels are “well beyond” any regulatory requirement and will continue to grow, buoyed by earnings.
Yet all forms of new capital look “relatively limited,” she warns. Loss history means reinsurers are reluctant to back down on pricing. And, as ever, any new losses can change the tone and the demands quickly, she added.
Even buyers are resigned to the prospect of further price increases, a Moody’s survey of top cedants has shown. “It does seem that there is momentum for further increases for reinsurance,” Carvalho-Neff said.
Buyers will seek to avoid contributing to those price gains. The Moody’s survey showed most cedants are also reluctant to purchase additional coverage in the coming renewal cycle. But all conclusions are good only to the next major storm. “It will be interesting to see if cedants don’t buy if they continue to see cat losses through the remainder of this year.”
Main image: Shutterstock / Karol Moraes