Reinsurance reset – Higher exposure of insurers is structural, not cyclical: Moody’s

Moody’s Ratings does not believe reinsurance sector will resume assumption of coverage at the levels previously seen, meaning the higher exposure being borne by primary insurers is deemed now structural, rather than a cyclical occurrence.

It reflects the determination of many in the reinsurance and insurance-linked securities (ILS) community, that attachment points will remain higher and is underscored by the lack of appetite for lower layers and aggregate coverage of so-called secondary perils.

The fact reinsurance coverage terms have reset higher and with stricter conditions might be viewed as just a part of the typical hard-soft market cycle that has been seen historically in the sector.

Moody’s notes that insurers exposure to small but frequent weather events now remains above historical averages.

Saying, “With reinsurers unlikely to restore previous coverage levels, we see the primary sector’s higher exposure as structural rather than cyclical.

“This may force primary insurers to raise their prices, adding to recent inflation-related increases.”

Moody’s sees P&C insurers as “vulnerable to weather events” now, adding that survey data shows that “primary insurers’ reinsurance protection has not improved in 2024, such that the sector remains vulnerable.”

While Moody’s acknowledges the cyclical nature of the reinsurance market and that prices are peaking now, it believes reinsurers are now “unlikely to restore coverage of secondary perils, or of accumulations of such events, to pre-2023 levels.”

Which is challenging for primary insurers, especially those that have become accustomed to relying on reinsurance to absorb that kind of volatility for them.

Which could lead to primary rate increases and a continued push for the promotion of prevention and resilience measures, to encourage clients to lessen the initial impact of weather events, although Moody’s notes this will take time to bear fruit.

It’s more of an issue for the regional insurance market, as global players have been able to reduce their exposure to such weather events by expanding in other lines of business as a counterweight.

The smaller, local players cannot achieve this without reducing their market shares, the rating agency explains.

Moody’s says that it understands that some primary insurers, “plan to negotiate improved coverage for some secondary perils during the 2025 reinsurance contract renewals.”

But explains, “We expect reinsurers to maintain strong underwriting discipline. We do not anticipate that they will significantly restore coverage against secondary perils or an accumulation of such events, and expect reinsurance protection to remain well below pre-2023 levels. Primary insurers’ retention of weather risk will therefore remain broadly similar next year.”

All of which is reminiscent of discussions on the reinsurance market cycle being “different this time,” which we have heard a number of times before over the more than two decades we’ve been covering the space.

We concur with Moody’s conclusion that reinsurers want to remain disciplined, attaching higher up and reducing the volatility they assume.

But we are hearing increasingly about companies that are trying to find common ground with the primary market, helping them out at different levels within their capital stacks, to reduce some of the pressures from volatility.

There have also been discussions, in reinsurance and ILS circles, as to how capital providers can construct coverages that will be useful at the lower and more frequent loss levels, but come with a better alignment at the same time.

One factor that cannot be overlooked, is primary insurers increasing use of reinsurance, including catastrophe bonds, at higher-levels in their towers, growing their overall coverage even when it still attaches higher up. Using reinsurance capital as a lever to allow more growth, in an attempt to compensate for some of the volatility they suffer lower down.

At this stage, it does not feel like anyone has quite the right model for this yet, but we’ve even heard of primary insurers considering how parametric solutions might dovetail with their traditional reinsurance arrangements and provide a level of capital relief in the event of certain named peril catastrophes and how that can provide some support, allowing them to bear the costs of frequency losses more readily.

All of which speaks to a continued need to innovate not just the risk transfer structures used, but the way people think about capital, from all its sources.

As we reported yesterday, a study undertaken by Aon suggests growing use of reinsurance or third-party capital and increasing use of these capital tools as levers for growth, which can also help to reduce pressures and offset a dearth of coverage lower down.