Property cat pricing power could fall 5% to 10% at mid-year: AIFA conference

According to a report from analysts at BMO Capital Markets, a prominent reinsurance broking executive from Howden Tiger said that property catastrophe pricing power is likely to fall by up to 10% at the upcoming mid-year reinsurance renewal season.

The comments were made at the Association of Insurance and Financial Analysts (AIFA) conference yesterday.

The BMO Capital Markets’ analyst team report that the commentary from the Howden Tiger executive suggested an expectation that price pressure will be seen at the mid-year renewals, as appetites for writing more risk rises.

Another dynamic to watch out for at the mid-year reinsurance renewals is that “meaningful social inflation related insurance reforms in Florida, which appear to be showing signs of working/aiding insurers” could also play into appetites for risk, perhaps influence pricing as well.

The BMO analysts said that the broking executive further highlighted a recent trend for reinsurers becoming more willing to take on risk lower down in the reinsurance tower.

Which all ties in with the dynamics being seen and that we’ve been reporting on, of a growing appetite among reinsurers to make the most of hard market conditions, giving more confidence to take on some lower layer risk, following a year where reinsurance capital had appeared more cautious at mid to lower layers of the tower and retrenched higher up.

Reinsurance demand is also expected to rise further at the mid-year renewals, with the broking executive saying at the conference that organic growth in reinsurance could increase by low double-digits again at renewals.

A combination of factors continue to drive demand for reinsurance protection, including underlying property-replacement cost inflation and population growth, the analysts highlight.

A 5% to 10% decline in property catastrophe reinsurance pricing would not be an overly significant softening. It’s also unlikely to be even across layers and return periods, with higher layers likely to come under the most price pressure again, especially with competition from the catastrophe bond market.

In fact, some softening may be a rational response to an improving market situation, such as in Florida, although it is likely also driven by the fact major losses have not been as significant over the last year, since reinsurance capital retrenched higher up and away from the frequency losses that have hurt insurers over the last twelve months in the United States.

Commenting on what they heard at the AIFA event, BMO Capital Markets analysts said, “Should this prediction come to fruition, it shouldn’t come as a major surprise to most investors who we estimate appreciate property-CAT pricing power is closer to its peak, assuming normal weather loss activity. That said, we do estimate a higher end of the range 10% pricing decline could put incremental EPS pressure on some reinsurance segments within reinsurance stocks (note: most reinsurers write a lot of non-property insurance, which is seeing pricing accelerate).

“We also point out that supply/demand dynamics within the reinsurance marketplace remain tight, meaning should there be a major property loss, we estimate pricing would re-accelerate.”