Strong catastrophe reinsurance profitability expected in 2024: KBW

Despite there being some evidence of softening at higher and more competitive layers of reinsurance and retrocession, analysts at KBW expect 2024 will deliver strong catastrophe reinsurance profitability, loss activity allowing.

The analysts expect “largely flat rates on line and terms and conditions” at the January 2024 renewal season, keeping the profit potential of portfolios of catastrophe reinsurance high at the start of the year again.

As reinsurance market conditions remain challenging, with cedent attachment points still expected to remain higher through 2024, there is a likelihood of further homeowners insurance rate increases being needed, to help primary companies deal with the continuation of firm market conditions.

In addition, KBW’s analysts say that, “We expect rate increases to accelerate further as insurers recalibrate their exposure to adverse weather, notably including billion-dollar severe storms, whose frequency has risen dramatically in recent years.”

This is also set to be a driver for the reinsurance rate side of the market, where despite the higher attachments there remain concerns over rising frequency and severity of catastrophe losses.

For reinsurers in 2024, KBW’s analyst team states, “We expect the overall 2024 property-catastrophe reinsurance environment to look mostly like 2023, including high pricing – we expect 2023’s significant increases to largely hold steady – and revised terms and conditions (most notably higher reinsurance attachment points and scarcity of aggregate covers that together imply that reinsurers are no longer protecting cedents’ earnings).”

With inflows of capital still largely seeming to target higher-layers of reinsurance and retrocession, especially in catastrophe bond form, KBW’s analysts do not yet see capital as a significant factor for rates.

“Critically, there has been very limited capital inflows from traditional/newly formed reinsurers or from insurance-linked securities investors other than for (generally high-attaching) catastrophe bonds,” they explain.

Adding that, “Potential reasons include now-higher returns available elsewhere or broad concerns over climate change, but still-constrained capacity combined with likely growing demand (itself a function of the primary property insurers’ poor 2023 underwriting experience and the growing reinsurance budgets stemming from rising primary property insurance premiums) should sustain or modestly improve overall operating conditions.”

Because of this, KBW’s analyst team forecast “consistent or modestly improving conditions on their property and catastrophe writings,” for the Bermudian reinsurers and the same can be expected for reinsurers elsewhere with a property cat focus, it seems.

However, it was KBW’s analysts that previously said that the areas of the market that would see the greatest pressure on rates at the January 2024 renewals would be in the higher layers of reinsurance and retrocession.

As we reported yesterday, market sources are suggesting this has been one of the major trends at the renewals, the return of some pricing pressure in higher layers of the retrocession market, which also appears to be spilling into ILW’s as well, mirroring the pressure on spreads seen in some newly issued catastrophe bonds.

But, the KBW analyst forecast, that catastrophe reinsurance profitability will remain higher in 2024, also mirrors expectations for the insurance-linked securities (ILS) market, with pricing remaining well-above the last soft market, for now at least.

Time will tell how much resolve reinsurers and ILS managers have on price over the coming few quarters, which are beginning to look critical for the longer-term profitability of certain segments of this market.