Insuring the risk of catastrophic hurricanes and earthquakes risk probably isn’t getting cheaper. But at least there might be more coverage coming to relieve the troubled insurance market.
Going into last year, rising interest rates helped lead to a slower influx of capital into reinsurance, which is the backstop that insurers use to protect against so-called tail risks such as hurricanes and earthquakes. That finally gave the upper hand to reinsurers in pricing negotiations, after several years of seeing their pricing struggle to keep up with the rising losses on global catastrophes. That in turn led primary insurers that sell coverage to individuals and businesses to bear more of their own risk.
Global reinsurers posted a return on equity of 21% on average in the first nine months of 2023, up 18 percentage points from the prior year, according to Fitch Ratings. Meanwhile, primary carriers have cited higher reinsurance costs for decisions such as halting sales of new homeowners policies in places like California. Property-casualty insurers overall are projected to have seen a drop in underwriting performance and returns in 2023, according to Fitch.
Yet judging by recent stock moves, investors seem to think that the tables are turning. Shares of reinsurance providers such as Arch Capital Group, Everest Group and RenaissanceRe have fallen over the last three months. Meanwhile, primary insurers such as Allstate, Travelers and Progressive all have beaten the S&P 500 over that time.
As higher returns draw in more capital to reinsurance, it will likely take some pressure off pricing of coverage. Already, a surge in returns for catastrophe bonds—or securities that pay premium interest rates, but can lose their principal in the event of a stated event or loss—helped spur issuance last year, which hit a record $15 billion, according to Swiss Re.
“Significant growth in the catastrophe bond market was a key supply-side driver” in the beginning of the year renewals, according to a report by brokerage Howden Group. In the lead-up to renewals, strong demand for cat bonds helped their pricing fall “in the 10% range,” Howden wrote.
Overall, pricing for global property catastrophe reinsurance, as measured by Guy Carpenter’s Global Rate on Line Index, was up about 5% for the Jan. 1 renewals. That was down from a jump closer to 30% this time last year.
But reinsurers haven’t lost all the momentum of last year’s “hard” market. Importantly for them, they are still reportedly getting elevated “attachment points” at which they begin to bear another insurer’s losses. Analysts at JPMorgan Chase wrote in a recent note that “reinsurance structures did not come under pressure.” That can continue to boost their performance and pressure primary insurers.
Also, some of the capital coming back into the market is in the form of reinsurance for reinsurers. This is known as retrocession, or “retro.”
Aon wrote in a report that “greater availability of retrocession capacity” was one factor that “encouraged many reinsurers to display increased appetites.”
This could be a win-win across insurance. Reinsurers can grow their books without having to put more risk on their capital, adding to their earnings and to the protection available to primary insurers.
“When there’s more retro capacity available, eventually that makes insurance for policyholders more available and affordable,” says Bill Dubinsky, chief executive of Gallagher Securities, the capital markets unit of Arthur J. Gallagher’s reinsurance division. Gallagher Re in a report said that risk-adjusted prices for retro declined by as much as 15% for the Jan. 1, renewals.
Reinsurance for reinsurers might be a head-spinning concept. But it is also a way to help unclog the coverage market.