This article was originally published in Global Reinsurance
The perfect storm of 2022 has nourished the green shoots of investor optimism in 2023
You would be hard pushed to find anyone in property catastrophe reinsurance who wouldn’t agree that it’s been a tough few years in the sector, particularly in the US.
Natural catastrophes have had a significant impact and, according to PCS, over the past 30 years, there has been an estimated $830 billion in insured losses, 36% of which have occurred in the past 5 years.
Understandably, as a result, investors have lost their appetite for injecting capital and so there has just not been enough capacity to underwrite the risk with demand out-stripping supply.
It’s been a vicious cycle: increasingly costly catastrophic risks need to be underwritten but reinsurers are struggling to meet their clients’ needs due to a lack of investor funds.
In all, this cycle has meant that reinsurers have been under increasing strain resulting in an estimated shortfall in limit of between $20 billion-$50 billion.
Despite the well-documented “fear” in the investment community and concerns over volatility and climate change, we are beginning to see some shoots of optimism emerge, an indication that the situation may be changing for the better.
Why? Well, if you do the same thing over and over, you get the same outcome or results. Over the past few years, reinsurers have been promising higher prices and more restrictive cover in order to attract investment, but they haven’t delivered.
Instead, the rhetoric around reinsurance and natural catastrophes has been increasingly negative, premiums have changed (but not by nearly enough), and structures were left largely unaltered. Investor confidence fell as a result.
But, a perfect storm of events in 2022 (the Russian invasion of Ukraine, Hurricane Ian, rising inflation and investment losses from increasing interest rates, and challenging energy prices) finally resulted in reinsurers delivering much needed strong resolve.
The recent 1 January 2023 US renewal season saw reinsurers charge a significantly higher price that was commensurate with the risk that they were willing to cover.
According to Howden, prices were up (on average) by a minimum of 37%, the biggest year-on-year 1st January increase since 1992.
For the first time in many years, we saw pricing that was durable. I was underwriting in Lloyd’s in the post-Andrew period and that was the hardest market I thought I would ever see. 2023 is proving me wrong.
This was the circuit breaker. As a result of reinsurers collectively putting up their prices as well as restricting cover, we have seen some investor optimism in reinsurance start to return which is incredibly encouraging for the sector and most welcome.
The supply and demand issues of recent years have been frustrating for underwriters, brokers, reinsurers and MGAs – we now need to maintain the momentum and build on this positive start to the year if we are to come anywhere near close to providing a fit for purpose property catastrophe reinsurance market that makes superior returns for those investing in it.
So, what steps are needed to keep up this momentum, attract investors and maintain a strong financial position in 2023?
This isn’t an overnight fix, or even a 2023 fix, but I definitely believe that, if the sector continues to adopt re-calibrated pricing models and drive a positive narrative around investing in reinsurance, we will start to see those green shoots take hold and we may be looking at a significantly different reinsurance environment in five years’ time.
Reinsurers cannot predict the frequency or size of natural catastrophes but, with the benefit of experience, smart technologies and industry data, we can at least charge a price that is commensurate to the risk we are willing to take, in order to help guarantee long-term future investment in the reinsurance market.
David Carson is head underwriter, K2 CAT