Fitch Ratings analysts believe that reinsurance rates will continue to rise during the January 2023 renewals, even if there are no major catastrophe losses in the second half of the year.
The agency notes that H1 global insured natural catastrophe losses were manageable for the insurance and reinsurance industry this year, at $34 billion, and far below the $47 billion level recorded for the same period in 2021.
Nonetheless, the June-July 2022 renewals were the tightest since the devastating 2004-2005 hurricane seasons in the United States, with many reinsurers reducing catastrophe risk capacity, particularly at lower layers and for aggregate XOL treaties.
Other reinsurers expanded catastrophe business, but remain underweight in Florida due to concerns in the dysfunctional market, despite recent rate increases of up to 50% for Florida property loss hit business.
Instead of large catastrophe losses, Fitch explains that pricing momentum has been driven by the ongoing supply/demand imbalance as reinsurers maintain pricing and terms and conditions discipline, even with higher interest rates.
As a result, analysts believe that the market will continue to harden through 2023, regardless of the level of catastrophe activity seen during the rest of the year.
According to Fitch, reinsurance capacity will be selectively constrained at 1/1 due to decreased property catastrophe risk appetite, with business shifting to less volatile casualty and specialty lines.
It also predicts that reinsurance demand will remain strong as primary insurers deal with increased risk and higher inflation drives up total insured values.
This year’s pricing momentum has also been influenced by concerns about ultimate rate adequacy as a result of persistently high catastrophe losses, potential losses from the Russia-Ukraine war, and deteriorating loss-cost trends with high core economic and social inflation.
And, following several years of above-average catastrophe losses and trapped capital, collateralised quota-share reinsurance and sidecar vehicles are expected to withdraw from the market at next year’s renewals, resulting in reduced retrocession capacity at higher rates.