Howden: Global property cat rates up 9% at 1.1 as pricing returns to 2014 levels

Risk-adjusted global property catastrophe reinsurance rates increased by 9 percent on average at the 1 January renewal – the biggest year-on-year rise since 2009 – with the price hikes reflecting the $100bn+ of losses suffered by the market in 2021, according to Howden.

  • Risk-adjusted global property catastrophe reinsurance RoL up 9% at 1.1
  • 1.1 rate rises mean property cat pricing now at 2014 levels
  • North America average RoL up 6.5% at 1.1
  • Differentiation “a key feature” of North American renewals
  • Retro XoL rates rise 15% as trapped ILS capital and losses hit
  • Retro pricing now approaching levels last seen in 2009

The 9 percent average rate rise recorded at 1 January 2022 compares with the 6 percent increase posted at the beginning of last year.

The rate rises tracked by Howden are slightly below the 10.8 percent increase in Guy Carpenter’s global property cat RoL index at 1 January.

As Howden noted in its newly published Times are a-changin’ report, the latest rate increases have taken pricing to a level last seen in 2014 and reflect another active catastrophe year.

In 2021, property cat losses exceeded $100bn for only the fourth time on record.

Howden global risk-adjusted property-catastrophe rate-on-line index – 1992 to 2022

“With insured losses since 2017 now approaching $500bn in aggregate – driven by the effects of climate change, higher asset values and rising loss settlements due to higher construction/labour costs, as well as infrastructure vulnerabilities – concomitant portfolio remediation around lower layers especially created capacity constraints for buyers that were only offset partially by markets in growth mode,” Howden said.

Floods and storms drive Euro rate rises

Given that the 1 January property cat renewal has a higher weighting to European programs, the region’s loss experience had a significant influence on the overall rate rise recorded.

Howden highlighted that not only did the floods and storms that hit Germany and other neighbouring countries push losses beyond previous highs, they also served as a reminder of the exposure that resides in the region after years of benign loss activity and repeated price decreases.

The broker also said capital capacity providers’ desire to achieve perceived pricing adequacy for lower-attaching perils led to more disciplined underwriting as well as higher attachment points across various European-based reinsurance programs.

With fears mounting that events such as the European floods and storms will increase in number as the impacts of climate change take hold, Howden said the availability of aggregate capacity shrank, with per event protection more widely on offer.

Global insured catastrophe losses by quarter – 2012 to 2021-

“Programs in loss-affected territories typically saw double-digit increases on a risk-adjusted basis, with significant changes to structures that included higher deductibles and a shift towards occurrence cover,” Howden said.

The impact of the flood and storm-related losses was evident as pricing in countries less affected by the event “was flat to up modestly”, Howden said.

North America renewals challenged

The average rate on line for North American programs that renewed at 1 January was 6.5 percent, Howden said, with pricing in the region having come off a higher base.

By comparison, Gallagher Re reported increases of 2.5-10 percent for loss-free property cat business in the US, with loss-impacted renewals rising 10-25 percent.

Howden said the price rises in North America reflected the impact of Hurricane Ida – one of the largest hurricane losses for the industry ever – which has pushed some local Louisiana-focused insurers into receivership.

Losses from Winter Storm Uri were another influencing factor on North America’s 1 January reinsurance renewals, as well as a series of other large losses in the US during 2021 such as the tornado outbreak that occurred unusually late in the year and generated one of the most costly severe convective storm events on record.

Global insured natural catastrophe losses by peril – 2013 to 2021

Differentiation a major factor

Differentiation was “a key feature of US renewals”, Howden said.

The lower layers of programs that are exposed to both frequency and severity of mid-sized losses saw what the broker said was “significant pricing pressure and restructuring” with higher attachment points imposed to better reflect the loss dynamics witnessed in recent years.

Less acute tensions for higher layers helped cap overall risk-adjusted rate increases to mid-single digits.

Looking ahead, the late placement of retrocession programs meant that property cat reinsurers had led less clarity than usual around their net positions when it came to offering terms at 1 January, the broker said.

As a result, and when combined with S&P Global Ratings updating its catastrophe charge methodology, Howden predicted there will likely be continued purchasing interest heading into 2022 and the North Atlantic hurricane season.

Retro XoL rates rise 15% as trapped ILS capital and losses hit

Risk-adjusted rates on line for retrocession catastrophe excess-of-loss business increased 15 percent at the 1 January renewal with aggregate pricing “seeing sharp increases” and some loss-affected occurrence covers facing double-digit rate rises, according to Howden.

Trapped ILS capital and the impact of large losses combined for a “difficult” retro renewal, Howden noted.

“After five successive years of price increases, the cost of retrocession protection is now approaching levels last seen in 2009,” the broker said.

“This equates to an average increase of more than 75 percent since 2017,” the broker added.

With capacity for proportional and aggregate covers constrained, and budgets to secure retro protections flat, Howden said some buyers had to restructure their programs or explore alternative solutions.

Howden risk-adjusted non-marine retrocession catastrophe and global direct and facultative rate-on-line index – 1992 to 2022

Those alternatives included retaining more risk, moving from aggregate to occurrence covers, raising attachment points, narrowing coverage or turning to the cat bond market. 

The challenging retro market had knock-on effects for the supply of property cat reinsurance capacity at 1 January, the broker said.

Unlike at other recent renewals, Howden said no late wave of capital entered the market to help offset the pressure on rates.

As the broker explained, uncertainty over development of major losses combined with investor frustration after successive previous years of “lacklustre performance” were a major influence on fundraising discussions.

Ultimately, those concerns led to a capacity reduction at renewal.

“Climate change, and the attendant issue of catastrophe model efficacy, were also decisive factors this year, with the unusual mix of secondary events fuelling sentiment that changing weather patterns are now increasing both the frequency and severity of climate-sensitive perils,” Howden said.

Unlike the cat bond market, which has emerged from the significant losses of the past five years relatively unscathed because of its typically more remote attachment point, collateralised quota share and sidecar vehicles suffered significant impairments, the broker noted.

As a result, earnings protection-focused capacity “was scarce” at 1 January as the combination of Winter Storm Uri, the European floods and Hurricane Ida eroded a large portion of the aggregate limit placed.

Both the European floods and Hurricane Ida also triggered some occurrence losses, Howden said, although these were mostly focused on lower layers.

A further complicating factor for the market was the tornado outbreak on 10 December in the US which was not only an issue from a timing perspective, but also added further strain to already depleted aggregate covers. That led to more capital being trapped and further added to reinsurers’ concerns about pricing for secondary perils, Howden said.