PROPERTY-CAT CAPACITY
Capacity shortfall writ large in 2022
As big name reinsurers pulled back from nat cat in the wake of ongoing losses, fresh capital showed little signs of materialising.
The top stories in 2022 property-cat may have been the ones no-one ever got to write or read: the 2022 vintage reinsurers that never launched, the superstar debutantes that didn’t parade on Monte Carlo’s famous Carré d’Or, the fresh capital that never flowed. Some rumours swirled, but news seldom hit.
“Normally we would be expecting some quite positive signs in the market and a lot of press coverage about new entities starting up and capital flowing in,” the chief underwriting officer of Hiscox Re & ILS, Matthew Wilken, told Intelligent Insurer in an interview ahead of a tough round of renewal talks at Baden-Baden. “If anything, the speculation has been of the reductions and the reticence to re-engage.”
The list of capacity blockers was long: reinsurers had fallen prey to five straight years of losses with rate adequacy still elusive, secondary perils had gained the upper hand, insurance-linked securities (ILS) money stood trapped as collateral and H1 investment losses trimmed capacity.
Crucially, signs showed the retrocession market was even more blocked. And that was just pre-Hurricane Ian, and it wasn’t counting what inflation had done to the demand side of the reinsurance market equation.
“There are small pockets among reinsurers that could increase by a small margin,” Beazley’s deputy head of treaty reinsurance Mark Vaughan told Intelligent Insurer in early October as the US renewals talks kicked off at the APCIA convention in Dallas. “But it is hard to see anyone walk in and significantly increase capacity.”
So in place of the usual hopeful new forays into property reinsurance, headlines were dominated after Hurricane Ian by retreats or wound-licking by incumbents who started adjusting to speaking of six years of running losses, no longer just five.
Axis Capital delivered arguably the biggest dose of shock and awe with its retreat. Axis capped off a period of heady nat cat reductions, including a 25 percent cut in the property-cat book at 1/1, 2022, with a mid-year announcement it would abandon property-cat reinsurance altogether. By the time July renewals had gone by, probable maximum losses (PMLs) were down about 65 percent on average across the curve at Axis, versus 2019.
Axis is paying a price, but still working to manage a smile. “Yes, there is a risk that we would lose some business,” CEO Albert Benchimol said in late October. “Some cases may arise where cedants have to take some specialty or liability business away from Axis to facilitate a troublesome cat placement with a rival reinsurer.”
“It is hard to see anyone walk in and significantly increase capacity.”
Mark Vaughan, Beazley
Underwriting remediation
If Axis shocked by the scale of its retreat, French global reinsurer SCOR shocked with its continuing example of a reinsurer sufficiently battered by nat cat to be forced into ever-accelerating retreat.
“We should not assume the past five years are exceptional; they are probably the new normal,” SCOR CEO Laurent Rousseau said in announcing an acceleration of his group’s pull-back from property-cat after Q1 losses.
SCOR responded to a cat-laden Q1 loss by upping its targeted PML reduction for 2022 from 11 to 15 percent amid acknowledgement that “we have to be able to walk away”. By Q3, SCOR had reported a full 20 percent decline in PMLs and €900 million in cancelled business. But it also reported another €270 million in quarterly net losses driven by Q3 nat cat and new reserves.
“These Q3 results demonstrate the need to go further” in underwriting remediation, Rousseau offered by way of déjà vu.
The story had some roots in 2021 with capacity cutbacks from the likes of Aspen or Everest Re. As momentum built in 2022, “reduce earnings volatility” and “strengthen earnings stability” became the unceasing mantras of firms across the sector.
By Q3, Lloyd’s management was talking tough with members, Tokio Marine Kiln dropped treaty reinsurance altogether, RenaissanceRe and Berkshire Hathaway closed retro facilities with kick-on effects for their reinsurer clients and the snowball grew as it rolled. Speculation and inside reports seemed to come once a day by December.
“Axis Capital delivered arguably the biggest dose of shock and awe with its retreat.”
“We are seeing reinsurer appetite change weekly, daily,” Gallagher Re senior vice president Alicia Gerte was warning a key reinsurance buyer by mid-December.
The industry had gone into the renewals season knowing full well a capacity shortfall lay ahead. Just ahead of the Monte Carlo Rendez-Vous, AM Best and Guy Carpenter estimated dedicated reinsurance capacity would fall by around 6.7 percent in 2022 including an 8.4 percent decline in traditional capital which the analysts thought could yet be offset by minor gains in third party capital. Market losses and mark-to-market bond losses on higher interest rates had already delivered the “highest capital utilisation levels in recent history,” the analysts claimed.
For the optimists, Hurricane Ian may have given some initial hope that an ensuing final uplift to rates might bring in a wave of fresh capital. It has happened before. But that optimism proved very short-lived.
“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,” said Vaughan. The mantra of reduced earnings volatility had been reinforced.
ILS money, which hadn’t grown significantly in several years, was widely said to be suffering “loss fatigue”. H1 issuance was strained even as rate hardening should have been sweetening the deals, one report indicated. Cat bond issuance was down 5 percent to $8.1 billion in the first half of 2022 even as spreads rose. Q2 was down 16 percent year on year.
More deals failed in H1 2022 than in recent memory, and issuance thereafter dried up almost altogether.
Image: Shutterstock / Natalia Deriabina
