Reinsurers may give up rate for retentions in cat but buyers face casualty challenges

This year’s Rendez-Vous de Septembre will see a focus on both core reinsurance lines amid softening pressures in property cat – especially if the hurricane season continues to defy predictions – and mounting concerns in casualty.

Against a backdrop of impressive non-life reinsurance results over the past 18 months and a strengthened capital base, cedants could be forgiven for expecting a buyers’ market, with plenty of competition among reinsurers seeking to capitalise on the strong returns on offer.

The reality may be rather different, however, with reinsurers looking to grow in cat – while staying within boundaries set in the hard market that began two years ago – but more cautious in other more challenging lines of business.

Our thematic lead article tomorrow will focus on casualty, a topic also picked up by Hannover Re CEO Jean-Jacques Henchoz in our front-page exclusive interview today.

And it is clear sometimes challenging conversations between cedants, brokers and reinsurers, particularly in relation to US casualty, will be one of the dominant themes of the autumn conference season.

As we will report in greater detail tomorrow, there is a growing conservatism among reinsurers about casualty exposures and greater scrutiny of the underlying portfolios, cedant actions to address loss cost trends through rate, terms and conditions and limits management, and the health of their reserves.

This will likely lead to a nuanced renewal with a cedant-by-cedant and program-by-program view, and there is a consensus that few – if any – reinsurers are looking to grow in any meaningful way in casualty.

In property cat the picture is quite different, however.

Strong cat appetite

Halfway through what was predicted to be a highly active hurricane season it is still too early to call – albeit the absence of a named storm in the Atlantic Basin on Labor Day was certainly a rarity.

The strong consensus is that for US cat, the underlying insurance market will see more meaningful softening in 2025 in the absence of significant hurricane (or earthquake) losses, despite an active year to date for frequency losses including those from severe convective storms (SCS).

With the lion’s share of these frequency losses retained by insurers after the shift up in retentions and cat reinsurance attachment points in 2023, reinsurers have been generating very healthy profits from their books over the past 18 months.

Holding on to those higher attachment points such that the cat product is aimed more at balance sheet rather than earnings protection will be a key battleground, whether or not the wind blows.

Speaking to The Insurer just ahead of the Rendez-Vous, a senior executive at a global reinsurer said: “Assuming there’s no major hurricane that takes place between now and Monte Carlo, I think brokers will be pushing for softening of terms and conditions, price decreases and lowering retentions.

“And I think reinsurers will talk about being more flexible but remaining firm on attachment points and staying away from frequency losses. Of course, if there is a major hurricane, the dynamic changes quite dramatically.”

Holding higher retentions

Sources at reinsurers have said their priority in the US and on global accounts will be to hold the line on retentions, which have arguably changed the return profile for writing cat.

Reinsurers are also expected to target increased retentions in Canada, where attachment points remain lower and first layers of cat programs have been hit by frequency losses this year.

There may also be aspirations to raise retentions in Europe – where they are also significantly lower than the US – especially in loss-affected territories such as Italy, although sources said it would be “challenging” for reinsurers to make ground on the continent.

The impact of higher retentions in the US on reinsurer results is clear to see, and in a recent report S&P Global noted that most of the global players in a sample group it tracks have demonstrated increased appetite for cat, growing exposures over the last 18 months.

The rating agency said that based on 2024 cat budgets, it expects cat to add 3 percentage points to the returns on equity of global reinsurers this year, in part because they are taking a lower share of losses after pushing up retentions.

“If you can’t put decent business on the books in this market then you might as well just go home,” one senior industry executive suggested.

The increased appetite for cat has been a driver of competition in 2024, leading to modest rate reductions at mid-year – albeit with a slight tightening of the market in the latter stages of the US wind renewal amid active hurricane season forecasts.

“If we go storm free, it already softened at mid-year, and the top layers will probably come down a little more,” said a senior reinsurance broking executive, highlighting the role of ILS capacity, including cat bonds, especially out on the tail.

Continued strong demand for cat from ILS investors in 2024 has been reflected in record levels of cat bond issuance.

Another underwriting executive said they think reinsurers will be prepared to concede ground on rates – with reductions in the low to mid-single digits – in exchange for maintaining retentions where they are.

“I think brokers will push for more, but I think what’s good is the market has been disciplined and we just have to see if everybody remains that way,” they added.

Another senior broker source suggested: “I think reinsurers would prefer to give away a 10 percent rate decrease to keep the same attachment point.”

There is also an expectation that there will be leveraging between the lower and upper layers of cat programs, with reinsurers looking for smaller shares at the bottom than higher up.

Somewhat moderating competitive pressures is the sustained and growing demand for cat from buyers. This year saw significantly increased placements as insurers looked to add limit at the top of towers, with the higher demand comfortably absorbed by supply.

Question of discipline

But the question about sustained discipline from reinsurers is likely to be key to the outcome of the 1 January renewal.

“If it’s a profitable hurricane season, with more capacity coming in and more pressure on rates and attachment levels, will [traditional] reinsurers relent to hold on to market share? Will actual new ILS capacity re-enter the fray and pressure rates downward?” asked a senior reinsurer executive.

“Property cat, unlike long-tail, is more difficult to escape supply and demand dynamics because cedants have a far bigger pool of supply to tap given it is short-tail. If the season is as expected, or worse, I don’t see the reinsurance market backing off much at all,” they added.

Away from property cat excess of loss, there is an expectation that buying conditions will continue to be more challenging in areas such as per risk – where reinsurers have been impacted by losses and the pool of players writing the product is smaller – and proportional.

And there is no expectation of any emergence of significant appetite from reinsurers to write aggregate covers at a price that makes economic sense to many buyers, even though there is strong demand for the product and new deals are expected to come to the market.