Property reinsurance prices to remain firm, if not harden, at least through 2023: AM Best

Rating agency AM Best is anticipating that property reinsurance prices in the United States remain firm, or harden further, right the way through 2023 at least.

In a recent report, AM Best looks at how now-elevated reinsurance pricing is set to affect the property and casualty underwriters across the US.

The rating agency expects pressure to build on those that had previously been reliant on reinsurance, while others will still feel additional pressure through, paying higher costs for reinsurance protection, or retaining an additional share of any catastrophe losses that occur.

AM Best says that weather-related losses continued to hurt the U.S. property/casualty (P/C) insurance segment in 2022.

This added pressure to their financial results in a year that also included a 40-year high for inflation and the second costliest catastrophe event on record in hurricane Ian, the rating agency noted.

The P&C insurance segment in the US saw a four-point year-over-year deterioration in the reported combined ratio, from 100.0 to 104.0, AM Best said.

Secondary weather perils continued to be a factor as well, and as a result of this pricing has continued to trend upwards, especially for most commercial lines, in 2022.

The need to combat inflation continues to be a key influence on industry premium trends, AM Best sayd, while at the same time the adverse trend concerning catastrophe losses and inflation are also exerting upward pressure on commercial property rates and pricing.

All of which is likely to feed through to more impetus for reinsurance rates and pricing as well, although how significant any increases will be and whether the market will remain firm, or harden further, is more challenging to predict.

“Elevated reinsurance costs and potential reinsurance capacity constraints are expected to further pressure the segment carriers’ operating performance in the near term, particularly those in CAT-exposed areas, as reinsurers continue to move away from lower layers and aggregate covers,” AM Best explained.

The challenges in the market drove the most difficult January 1 reinsurance renewals in years. AM Best expects these challenges will continue to affect reinsurer appetite through 2023 at least.

“Pricing conditions for property reinsurance are expected to remain firm, if not harden, at least through 2023,” the rating agency said.

Adding that, “Additional headwinds include inflationary pressures and supply chain challenges, which have increased the cost of adjusting claims, transportation of goods, and labor, although they do appear to be subsiding somewhat, as the gap between labor demand and supply narrows.”

Reinsurance pricing is tighter, but perhaps more importantly now its availability in catastrophe prone lines and states is lower and this may not recover for some time.

With no sign of that capacity squeeze easing yet, as AM Best notes, “Due in a large part to global economic issues, new market entrants and capital providers that have historically followed other large catastrophes have not materialized after Hurricane Ian in late September 2022.”

For insurance carrier this can create difficulties, as, “Rising reinsurance costs can pressure both operating performance and balance sheet strength if lower levels of reinsurance protection result in higher net probable maximum losses or net retained losses significant enough to erode surplus,” the rating agency continues to explain.

With the potential for more catastrophe losses to now fall within insurer retentions, as reinsurance attachment points are rising at renewals.

All of this is leading insurers to look carefully at the construction of their reinsurance towers and also to consider the capital markets as an alternative reinsurance capacity source again.

Which could play into further boosting the already busy catastrophe bond pipeline, as cat bonds, or other forms of insurance-linked securities (ILS) coverage, can be a welcome source of diversifying capital and added protection for any re/insurers looking towards their renewals and worrying what challenges may lie ahead.

The cost and availability of reinsurance protection is a real concern for 2023, for commercial carriers in particular, AM Best notes.

As a result, cat bonds and ILS are increasingly an option that must be explored.