2023 reinsurance “step change” broadly held, no desire to reverse it: KBW at AIFA

The “step change” in property catastrophe reinsurance pricing, attachments and terms seen in 2023 has “broadly held” at the renewals so far in 2024 and analysts at KBW said that, in the industry, almost no-one expects these changes to reverse anytime soon.

KBW’s analyst team were reporting from the Association of Insurance and Financial Analysts (AIFA) conference that was held earlier this week and came away feeling reinsurers and those providing capital to reinsurance are likely to experience stronger returns for a time at least, thanks to the step change’s that have been made.

At the conference, the analysts heard that, “Reinsurance executives remain very optimistic about the returns embedded in property catastrophe pricing, terms, and conditions.”

Adding, “2023’s “step changes” in property catastrophe reinsurance rates, attachment points, and terms and conditions have broadly held.”

The analysts noted that there has been “significant demand (mostly at the top of property towers) that is absorbing some of the capital generated through earnings,” which is helping to hold up pricing to a degree.

Concluding that, “Several executives acknowledged that another year or two of good reinsurer results (which, as 2023 proved, don’t require unusually low global catastrophe losses) should translate into more capital (traditional and/or ILS) deployed into catastrophe reinsurance.

“But almost no-one expects the 2023 “step change” in pricing and attachment points to reverse any time soon; reinsurers remain uninterested in assuming the frequency risk previously embedded in both low attachment points and aggregate covers.”

We understand that executives from Arch, RenaissanceRe and Everest all discussed the mid-year renewals at this event, saying that they expect broadly stable reinsurance pricing as demand will be continuing to increase, to soak up excess capital.

All of which is positive for the insurance-linked securities (ILS) market, even for catastrophe bonds where capital is pressuring price already as it suggests this pressure may prove limited.

Looking ahead to the mid-year and all-important Florida renewals, KBW’s analyst team came away from the AIFA conference feeling a picture of relative stability is the most likely outcome.

They explained that, “Most executives were increasingly optimistic about recent Florida reforms (most notably including the elimination of assignment of benefits and one-way attorneys’ fees) holding up, but remain reluctant to embed that in their near-term pricing assumptions and expect roughly stable mid-year property reinsurance pricing.”

The analysts expect the market to get a little easier for the primary players as well, with more stable reinsurance pricing, a little price leeway for upper-layers, but still accelerating primary rates at the same time, helping to improve returns for homeowners insurers.

Most P&C sub-sector management teams are optimistic about the outlook, the analysts said.

“We think it’s critical for investors to keep two things in mind: first, soft markets typically emerge much more slowly than hard markets, and (therefore) insurers typically produce very strong results even after P&C pricing peaks and starts to subside,” the analysts conclude on the state of the cycle, which also reads across to reinsurance and ILS as well.