Actual results key for capital to flow. Florida renewals to be tough: KBW

The analyst team at KBW led by Meyer Shields had more great insight to share in a recent report, that despite rates being so much higher in reinsurance, it is going to be the delivery of actual strong results that encourages more capital into the space, not forecasts of expected returns, while Florida renewals are expected to be a very challenging time for cedents.

As you might expect, given the significant increases in property catastrophe reinsurance rates-on-line at the January renewals, for many reinsurance companies and insurance-linked securities (ILS) strategies, any forecast of expected returns looks rosy.

But, after the challenging period since 2017, it’s going to take more than expected results to attract significant new capital, the analysts believe.

Which is a driver for them continuing to forecast a hard reinsurance market environment, in property cat at least, right through 2023 and probably into 2024 as well.

The analysts don’t expect reinsurance rates to increase as significantly at the Japanese renewals at April 1st, although the trend is expected to be towards more firming.

But June and July renewals could see sharper increases again, with the potential for rates to rise another step-change higher, year-on-year, it seems.

“Reinsurers expect the January 1 renewals’ “step-changes” in property catastrophe rates, attachment points, and policy terms and conditions to broadly persist throughout 2023 – and probably 2024 – with (less dramatic) improvement in other reinsurance lines from still-rising primary insurance rates and declining ceding commissions,” the analysts explained.

Adding, “Although some capital inflow is inevitable in light of dramatically-improved expected returns, rising yields on other investments, years of disappointing catastrophe reinsurance results, and many investors’ unintentional over-allocation to insurance linked securities (stemming from the combination of rising interest rates and weak equity markets) should require actual strong results – rather than just higher expected returns – before significant capital inflows resume.”

Another positive highlighted by KBW’s analyst team is on demand, as they say reinsurers are anticipating rising property insurance rates are set to drive the need for bigger catastrophe reinsurance purchases through 2024.

As a result, any increase in supply may be soaked up by also rising demand, helping to further sustain the markets current firm to hard equilibrium.

Commenting on the Florida market, KBW’s analysts note that while the reinsurance industry has been receptive to the reforms that have been announced, they are still “very hesitant to allocate significant capital to the state” because of concerns over plaintiff attorney’s ability to find loopholes or new ways to target the re/insurance sector.

“We still expect very difficult June 1 reinsurance renewals, comprising scarce capacity, much higher rates, persistently tight terms and conditions (such as up-front premiums, named-peril-only coverage, and June 1 – December 31 contract terms),” KBW’s analysts explained.

Adding that the Florida renewals could see, “Many thinly-capitalized cedents that simply will not be able to afford necessary reinsurance protection (including loss layers below and the Florida Hurricane Catastrophe Fund’s attachment points).”