Richardson: No global hard market as long-tail bifurcation demonstrates
Howden Tiger vice chairman Elliot Richardson has acknowledged that cat reinsurers will “sustain high rate levels” at 1.1 but says it’s a mistake to characterise the entire global reinsurance and specialty market as hard.
Opening The Insurer’s Pre-Monte Carlo Forum this morning, Richardson said there were pressures on a number of long-tail classes at both a primary and reinsurance level when factoring in social and loss inflation.
“Drivers in the primary market – especially longer-tail lines – are potentially even more divorced from what is happening in property cat. For example, there is now strong competition in financial lines leading to price moderation, as well as in workers’ compensation and D&O,” he explained.
He pointed to data from Howden Tiger’s NOVA which shows property cat rates were up “about 50 percent on a risk-adjusted basis [over the last two January renewals], while casualty excess-of-loss programs were up by little over 10 percent compounded over the same period – and this in an environment of rampant casualty claims inflation”.
By way of further contrast, he noted primary D&O rates were down an average of 15 percent in 2022.
Pressed on the reasons for the bifurcation, he said history shows that combined ratios for longer-tail classes often climb in a higher interest rate environment. In addition to higher interest rates, he said there was greater capacity available for certain casualty classes because of the current caution on property cat.
In contrast, available property cat capacity is constrained by reinsurer and investor caution, modest capital flows ($15bn in 2022/23 versus $30bn after Katrina), pressure on existing capital from mark-to-market investment losses and the heightened level of cat activity, he explained.
Observing that there was at least $50bn of cat losses in H1 2023 – and this was before the Hawaii wildfires and Hurricane Idalia – he noted wryly: “I can remember when this would have been a big first half.”
Richardson was speaking after Moody’s published a report which predicted that primary insurers would continue to absorb a greater share of losses in 2024 amid the tough rating environment combined with reinsurers remaining determined to maintain higher retentions.
Concluding his 1.1 market predictions, the former Aon and Benfield executive said: “The cat market is heavily influenced by short-term capital volatility, third-party capital entry and catastrophe trends. This is different from the rest of the market, which is driven more by the moderation of inflation and other economic factors.
“Net-net, we think the property cat market will sustain high rating levels heading into 1.1, with inflation and potential climate change loss volatility continuing to be priced in, although we do not expect to see the high level of positive rate seen over the last year.”
Looking at structural issues, he predicted that the “asset-light” model of reinsurers increasing use of alternative forms of capital and underwriting platforms such as MGAs and reciprocals will continue, although he acknowledged the fronting model was under pressure not least because of “increasing scrutiny of reinsurance security by rating agencies and regulators in the light of recent issues and fraud allegations surrounding letters of credit”.
In a presentation rich with historical references, he told the 300+ gathered at the WTW Auditorium that the current market has clear parallels with the mid- to late noughties.
“During this period, as with the post-Katrina era, the property cat market may see the first sustained period of positive economic value added for reinsurers since the global financial crisis,” he predicted.
Look out for further coverage and analysis from today’s event later today and in The Insurer’s Monte Carlo event coverage next week…