Rate Change Expectations & Catastrophe Losses
After an eight-year streak of rate increases, the consensus ahead of this year’s Monte Carlo Rendezvous was for the hard market to come to an end. These consecutive years of rate hikes have contributed to improved profitability for reinsurers on many lines of business, particularly after the 2023 and 2024 renewals.
US Casualty rates are expected to buck this trend however, thanks to continuing social inflation and loss costs for cases put through litigation. Large reinsurers have already faced deterioration in their US Casualty reserves over the last two years, particularly affecting the 2015-2019 treaty years.
It is likely that reinsurers will become more selective of their risks written on their casualty treaties. This, coupled with sustained demand for excess casualty covers, means we can expect this reduction in capacity to drive rates up further.
Going into the Rendezvous, the US Property market had been expected to stabilise this year after recovering from losses between 2017 and 2022, with a flat renewal or some rate reductions. However this may be dependent on the outcomes of recent hurricane losses.
Post-event estimates of insured losses from hurricanes Beryl, Helene, and Milton have been lower than initially expected, although reinsurers will likely remain steadfast in holding the favourable terms secured in the 2024 renewal season, with direct insurers retaining more risks. With insurers retaining more property losses, analysts are divided on their opinions of whether these events will be enough to move the dial towards rate increases.
The recent large-scale flooding seen across Central Europe could also lead to a harder European catastrophe property reinsurance market. Moody’s RMS estimates insured losses between €2.5bn and €3.5bn, primarily in Czechia, Austria, and Poland. Ahead of the Rendezvous, Hannover Re stated that they anticipated prices and conditions to remain stable for both the European property and casualty reinsurance markets. The increasing role of alternative capital, particularly through insurance-linked securities (ILS), has helped stabilise capacity in catastrophe reinsurance markets, though investor sentiment remains volatile.
The Protection Gap
These recent catastrophes highlight the insurance protection gap problem, both in Europe and the US. (Re)insurers mainly consider the insured loss statistics when looking at catastrophes, however the gap between these and economic losses is widening as property insurance becomes more expensive, or even unavailable in some areas. This leaves people unprotected and unable to recover in the event of a catastrophe.
The Central Bank of Ireland’s recent Flood Protection Gap Report highlights reinsurance availability as an upcoming challenge for flood coverage, as floods in Ireland become a higher frequency event. Separately, worldwide climate change trends may reduce reinsurance capacity offered to Irish insurers, potentially impacting insurance availability on the Irish direct market.
In 2023, the ECB and EIOPA explored policy options to reduce the protection gap in a discussion paper at the insurance, reinsurance, state, and European levels. One of the measures suggested by the paper was the use of multi-year reinsurance contracts, rather than the standard one-year term, forcing consideration of longer-term climate risks in the structuring of reinsurance contracts rather than adjusting premiums each year in response to experience. We provided a summary of this discussion paper, which is further explored in the recent European Commission Climate Risk Dialogue report.
In the US, the widest insurance protection gap arises from flood risks, with many property covers not including flood protection, sometimes unbeknownst to policyholders. Availability of separate flood insurance is limited, particularly in high-risk flood zones. The US National Flood Insurance Program is the largest provider of flood insurance in the country, but since 2004, it has made use of credit facilities from the US government to pay claims arising from large scale disasters such as hurricanes Katrina, Harvey, Irma. This highlights the ultimate burden on countries to step in to help bridge the protection gap.
In a recent report from Generali and the UN Development Programme, parametric insurance is noted as a potential solution to help reducing the US’ $1.8 trillion protection gap. In particular, the speed at which claims payments are made leads to faster recovery from loss events. In the discussion paper from the ECB and EIOPA however, they note that parametric insurance may not fill the need if a substantial loss occurs but the parameter thresholds that trigger a payout are not met.
Cyber Market Dynamics
The cyber insurance and reinsurance market has continued to be an area of growth, driven by increased demand and its profitability over recent years. Reinsurers have played a part in driving this growth by supporting direct insurers through quota shares and providing capital for this newer and more uncertain line of business.
Terms for these coverages are now more refined, with exclusions for emerging risks like cyber warfare and AI becoming more common in response to global developments in these areas. As the reinsurance market moves towards more standard terms for cyber coverages, estimating insured losses from major loss events will become easier, rather than the more custom cyber products of the past.
The CrowdStrike incident in July this year has brought cyber risk management to the forefront of Senior Management’s agendas in all businesses. From this we can expect demand for cyber coverages to increase, particularly on business interruption covers, as this is where most insured losses have arisen from.
There continues to be excess cyber capacity on the direct and reinsurance markets, as (re)insurers seek to continue the growth trend. This competition, combined with more cybersecurity measures adopted by businesses, will likely lead to reduced cyber insurance rates in the 2025 renewal.
Conclusion
As the reinsurance market begins to find equilibrium between supply and demand this year, future challenges to availability and affordability remain. Navigating the complexities of the renewal season requires expert guidance and a tailored approach to reinsurance strategy. At Grant Thornton, we can support you by offering:
- Secondment of actuarial resources to support the pricing of reinsurance treaties during the renewal period
- External specialist actuarial support on reinsurance pricing methodology and approach
- Independent review of the appropriateness of reinsurance arrangements
- Support with data manipulation and data analytics
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