US catastrophe reinsurance demand could rise 15% by 2024: Swiss Re

Global reinsurance giant Swiss Re estimates that the US catastrophe reinsurance market sees approximately $200 billion in demand currently, but says that this is expected to grow by as much as 15% by 2024.

The supply and demand dynamic in the global catastrophe reinsurance market remains unbalanced, Swiss Re’s Mohit Pande, Chief Underwriting Officer, Property, P&C Reinsurance and Mike Mitchell, Senior Underwriting Advisor, P&C Reinsurance state in a recent paper, and while inflation is beginning to moderate, it is expected to remain elevated for some time.

A continued revaluation of insured assets, under the spectre of inflation, is “expected to continue to drive increased demand for catastrophe reinsurance,” the global reinsurance firm notes.

The capital markets are unlikely to fully fill any gaps in capacity that persist, as supply continues to move too slowly to catch up with the increasing demand, Swiss Re suggests.

Saying, “Bruised investor appetite is unlikely to recover fully until catastrophe underwriters are again able to demonstrate a consistent track record of returns commensurate with the riskiness of our business and which outperform other assets classes.”

The demand is expected to persist, with a significant amount of additional catastrophe reinsurance capacity expected to be needed, especially in the United States.

“To put the increase in demand for catastrophe reinsurance into perspective, we think there is approximately USD 200 billion of demand from the U.S.,” Swiss Re said.

Explaining that, “With the risk drivers of climate change, demographic change and inflation remaining unchanged we expect that demand will see an increase of 10-15% between 2023 and 2024.”

The authors explained that Swiss Re and the reinsurance industry in general are beginning to see this increasing demand for catastrophe reinsurance coming through from personal lines insurance firms, as their sums insured get updated to accout for the rate of inflation, Pande and Mitchell explained.

In addition, they expect to see a similar increase coming through from commercial lines carriers, further hiking demand for catastrophe reinsurance.

At the same time, the pair from Swiss Re say they believe the industry will take a a more disciplined approach toward under-declared assets and total insured values (TIV), with average or margin clauses and other instruments expected to be used within reinsurance contracts.

“Both the inflation spike, as well as a soft market, had strongly reduced the industry discipline to deal with such factors in contract wordings,” the Swiss Re due explained.

In fact, Pande and Mitchell believe that until these exposure value related issues are sorted out and true exposures reported and kept up to date with inflation and other factors, “We will continue to see underperformance against expectations. Consequently, capital appetite will be constrained. In turn we would expect this to lead to hard market conditions continuing for some time until these dynamics play out.”

Mitchell said the industry is, “On the way to a new equilibrium between capacity demand and supply but still a long way to go.”

The pair wrote, “We need, as a re/insurance industry, to both generate sufficient retained earnings to grow our balance sheets, and to attract new risk capital to the market in order to maintain catastrophe reinsurance as a key tool in helping make the world more resilient. This will require strong partnership between insurers and reinsurers, improved underwriting data, and, to a degree, a reset of the distribution of value created between distribution, and capital.”

Adding that, “Our expectation is that limits will need to be topped up faster than new sources of risk capital accumulate, leading to a continuation of market conditions observed at January and April renewals for some time to come and until we’re able to reset that demand and supply equilibrium.”