An increasingly challenging looking property cat market for reinsurance renewals – both US and internationally – is likely to take center stage as the American Property Casualty Insurance Association’s (APCIA) annual meeting gets underway in Denver, Colorado today.


  • Issue of inadequate prop cat returns will be a key theme at APCIA, just like Baden Baden and CIAB
  • Reinsurers’ resolve for rate feels more determined this year after Uri, German floods and Ida
  • Retro market squeezed as capacity shrinkage (and trapped capital) adds to 1.1 challenges
  • Ratings agencies scrutinising capital requirements for climate risk = prospect of future loadings

In the absence of the Monte Carlo Rendez-Vous this year, Baden Baden and APCIA have arguably grown in importance as a barometer of where the market is heading for 1 January renewals and beyond, even if attendance numbers are not at pre-pandemic levels.

Although there will also be a strong focus on casualty – especially in relation to loss cost trends and looming social inflation – and capacity availability for cyber, the rhetoric from reinsurance company CEOs has arguably been stronger than usual in recent months on the need for rate in property cat.

And this time there is a sense that, unlike in recent years at 1 January, treaty underwriters will walk the walk as well as talk the talk as they push for double digit rate increases.

One driver is that there is a widespread recognition among primary insurers (as well as ratings agencies and regulators – see below) that climate change and other factors are redefining property risk amid a long period of elevated frequency and severity.

”Hurricane Ida is the latest US hurricane to confound expectations by producing a much bigger loss than its landfalling strength and footprint would suggest”

The property cat insurance sector has not made money in a number of years and at the recent CIAB event in Colorado Springs the theme of how to address what looks to be a meaningfully higher risk profile for the business was prominent in discussions.

Hurricane Ida is the latest US hurricane to confound expectations by producing a much bigger loss than its landfalling strength and footprint would suggest, largely as a result of flooding, particularly in the Northeast.

It came in a year that also saw the domestic industry experience Winter Storm Uri – a leftfield catastrophe with an outcome that wasn’t widely contemplated for an event in Texas.


Last year’s Derecho was also a redefining loss event, while the recent record on convective storms and wildfire has brought significant pain and highlighted the growing threat from secondary perils.

Across the recent run of cat activity, inflation of labor and material costs – heightened during the pandemic – have created an ever-present loss magnifier beyond the demand surge that is typically incorporated into cat models and pricing.

The combination of events and poor performance of the class means that strong pricing momentum is expected on the underlying property cat insurance business into 2022, and demand for reinsurance is expected to increase at 1.1 and beyond as carriers look to protect earnings and balance sheets.

Transatlantic forces

Another driver this year is that the pressures are mounting on both sides of the Atlantic. As previously reported, the devastating impact of European floods – especially in Germany – has created a surprise industry loss in excess of $10bn. It’s not that reinsurers don’t conceive of a prospect of a $10bn+ European cat loss but when they do, it is normally in terms of a windstorm. Not flooding. 

That means that rather than the tepid flat to low single digits increases seen on European cat renewals at the start of this year, there is a growing expectation that increases could move into the high single digits or low teens – with significantly higher rate rises for cedants that have gone through cat towers.

”It is true the public commentary from the biggest Continental reinsurers is not always a reliable indicator of where the market will end up”

It is true the public commentary from the biggest Continental reinsurers is not always a reliable indicator of where the market will end up - and especially what they say in Q4 during the shadow boxing of the renewal season.

But the specific language being used in the lead-up to 1.1 in recent weeks has a more determined tone than usual, with senior broking sources privately acknowledging they expect resolve to be greater than usual.

Earlier this month, Hannover Re’s Michael Pickel said that cedants hit by losses from the Bernd flooding will face rate rises of over 20 percent, and the talk from other reinsurer CEOs in the earnings season has talked more generally about the need for rate.

Sellers’ remorse and the potential retro crunch

With demand in the US likely to be up, there is also a strong possibility that supply of cat reinsurance will be down at 1.1 – a suggestion made by RenaissanceRe CEO Kevin O’Donnell last week on the Bermudian’s earnings call as he pointed to double digit increases.

There are two key factors that are expected to drive this.

One is that reinsurers are walking away from low attaching low return period layers on cat programs. Several reinsurers have told this publication in recent weeks that the burn rate on those layers and the frequency that they have been hit by mid-sized losses means they are repositioning their portfolios to move up towers.

”This renewal there is a widespread expectation that the cost of capital for property cat reinsurers will go up because of a shortage of affordable retro capacity”

Reinsurers have written some low attaching occurrence and aggregate covers in the past because they thought they would perform well, and are now regretting it. For example, Travelers’ underlying aggregate cover has proved a strong buy for the carrier over the last couple of years but an expensive write for its counterparties, despite its popularity at the time because of the big rate-on-line it offered.

Others have supported them because they’ve been pressured by clients and brokers to do so in order to get on attractive layers in other parts of the program.


At the same time, this renewal there is a widespread expectation that the cost of capital for property cat reinsurers will go up because of a shortage of affordable retro capacity. Some reinsurers will either have to cut back their writings or push hard for rate to cover higher retro costs.

The main reason for the expected crunch is another painful year for ILS funds, with anecdotal evidence of meaningful losses at several players and the expectation that large portions of AUM will be locked up for 2021 events with managers struggling to reload, as some also face investor redemptions.

That phenomenon will likely impact the supply of collateralized reinsurance – especially in Florida and Southeast renewals next summer.

But the market share in retro currently held by ILS funds means that the near term impact will be greater here, with the potential for aggregate capacity to dry up while occurrence limit could also be much more expensive and hard to come by.

Of course, 1 January for the US market in property cat reinsurance has a different profile from Europe – where the renewal date is the most important of the year as most programs incept.

But there are a significant number of US national and regional players that place their core property cat towers at 1.1. And if there is a shift in pricing dynamics in any major way towards reinsurers it will likely empower them to push even more aggressively at the key mid-year renewals.

That there is rhetoric from reinsurers in the lead up to 1 January is nothing new. But after ultimately acceding to relatively disappointing renewal pricing over the last couple of years in contrast to the hard market in property insurance, the next couple of months may at last see an outcome that comes closer to meeting reinsurers’ expectations.

Average annual loss and exceedance probability metrics by region

Regulators, ratings agencies and cat model vendors up the ante

Talk may be only talk, but there are also noises coming from other sources that could have a meaningful impact on the dynamics of demand and supply in the property cat reinsurance market.

Last week AIR Worldwide put out research suggesting that there is a 40 percent chance the insurance industry will face a $200bn cat loss year in the next decade.

That near-term view came as the modelling firm said the sector should currently expect a long-run annual average loss of $106bn – well above (+41 percent) the actual average loss over the past decade of approximately $75bn.

AIR president Bill Churney said that it is a “stark reminder” that the industry has been fortunate to not have had a major tropical cyclone or earthquake event in a highly populated region.

Meanwhile, at the more local level, model updates have pushed up expected losses in Florida – a state that has had a couple of near misses of the so-called “big one” and that already has plenty of loss inflation drivers because of its litigation environment.

The new RMS Version 21.0 North Atlantic Hurricane Models reflect changes to the statewide building code in the Sunshine State.

The update – which has been certified by the Florida Hurricane Commission – indicates that the changes could drive material increases on overall claim severity because they mean that a roof that might experience as little as 25 percent damage is required to be replaced in full.

Sources have pointed to even more meaningful increases in expected losses in some parts of the Sunshine State, driven by code changes and the revised view of risk, including the Panhandle.

At the same time, ratings agencies have signalled they are taking a closer look at the potential impact of climate change and other factors on cat risk, and what that means for the amount of capital insurers and reinsurers need to put behind their underwriting.

Last month, S&P warned that reinsurers could be underestimating their exposures to natural catastrophe risk by up to 50 percent as it highlighted the potential for a material increase in the amount of capital that will need to be held against cat exposures.

The ratings agency said its study represents a “starting point for dialogue” about modelling assumptions.

And if ratings agencies are sometimes viewed as de facto regulators of the industry, actual regulators are also getting involved.

Also this month the US Department of Treasury has warned that climate change is set to add pressure to the availability and affordability of insurance as it tasked the Federal Insurance Office (FIO) to move fast in analyzing the potential impact, particularly in areas of the country most vulnerable.

The FIO “should act expeditiously to analyze the potential for climate change to affect insurance and reinsurance coverage, particularly in regions of the country affected by climate change”.

It should act in accordance with Executive Order 14030 issued by President Biden earlier this year to look at potential disruptions of private insurance coverage in those regions, it said.