Sompo International’s Donelan: Cat capacity will come out of market if buyers challenge clearance price

The upcoming 1 January renewal currently looks set to be relatively flat for cat reinsurance after adjusting for inflation and exposure, with any buyers attempting to push pricing down likely to meet with caution from reinsurers around their use of capacity, according to Sompo International’s global reinsurance CEO Chris Donelan.

In an interview with The Insurer as part of our #ReinsuranceMonth series, the executive described the build-up to this year’s 1 January renewal that began at Monte Carlo last year as a transition period.

“There was a lot of disbelief about whether reinsurers were serious – about whether those that said they wanted out of cat were really out, and about whether those that said they needed a price point to clear,” he commented.

“I believe we mostly cleared the price for participation [at 2023 renewals], but I think if people test the clearance price, they’ll find capacity to be not increasing, in fact it could decrease,” Donelan added.

Despite the significant rate increases that have been seen at property cat renewals this year, the Sompo International reinsurance chief said that he doesn’t view market conditions as hard, instead describing it as a “fair market” where capacity is available for the right price. “What last year highlighted, is the fact we weren’t pricing anywhere near where what was needed in prior years,” Donelan noted.

“We’re not positioning to say we’re going to charge more; it just means this is a market where we won’t deploy more capital at this price. If the pricing is better, we’d deploy more capital,” he explained.

“Overall, it’s going to be about client behaviour. I think reinsurers have declared what they think their price point is subject to what their PMLs will allow them to write. There’s no new capital, and the RMS models are changing, so some will potentially have to buy more,” Donelan observed.

At the Monte Carlo Rendez-Vous last year, one of the major themes was significant new demand for cat limit that was expected to come from cedants to adjust for the impact of inflation at a time when reinsurers were also meaningfully pushing up retentions.

But the majority of the $20bn+ incremental purchase that had been expected from US insurers did not materialise, as buyers faced steep rate increases that drove up the cost of replacing existing cover, even with higher attachment points.

A number of insurers have subsequently come back to the market during the year to attempt to buy additional limit, and Donelan said he expects others that delayed the purchase at 1 January 2023 to seek to add to towers at the upcoming renewal.

Leaning in

The reinsurer continued its cautious stance around Florida homeowners business at the mid-year renewal this year – after retrenching from supporting the Sunshine State’s domestic carriers a couple of years ago because it did not see the cost of capital being a good trade for the risk.

But elsewhere Sompo International has leaned into property cat reinsurance along with property per risk quota shares in 2023.

Donelan said that on the per risk quota share deals, occurrence limits have come down, which has had the effect of removing a significant portion of the cat risk from that product.

“There’s less projected return than you would achieve in cat, but it’s a fairer trade now than in years past,” he revealed.

The executive highlighted the attractive underlying pricing environment on the deals – especially in property E&S – while attritional loss ratios are being positively impacted by the change to occurrence limits.

“We have grown that year on year and we plan on growing it again if the PML and the price entry makes sense,” he said.

Reducing cat exposures in per risk quota shares has shifted that risk back to the excess-of-loss cat market – where it should be.

Carrier retrenchment bad for industry

This year so far has been characterised by heavy “attritional” hits for insurers in the US, as record severe convective storm insured losses as well as other secondary perils have resulted in meaningful retained losses below higher-attaching cat covers.

It has also been dominated by news of carrier retrenchment, with several of the largest US insurers pulling back or exiting certain territories, especially in admitted personal lines.

“It’s not good when companies get to the point of exiting a line of business in a particular state. That means we failed at providing a product. We need to find ways to solve these challenges. I’m not being critical of anyone, as that’s their choice, but I don’t think it’s a good sign,” said Donelan.

He suggested that in property cat the insurance and reinsurance industry has a long way to go to catch up to trend, given the increase in the exposure base and impact of inflation, along with other factors that have driven up claims costs in some jurisdictions, such as litigation.

“You don’t really know what the true cost of a storm is until you start seeing the claims come in. But it’s never a good day when an insurance company has to withdraw from a part of the world because they say it’s not insurable.”

He noted recent reports that some homeowners are making the decision to go uninsured in the face of increasingly unaffordable premiums.

“We should be in that space. They’re self-insuring without a balance sheet. That’s not the optimal way of doing this,” Donelan concluded.