Expanded named peril list at 1/1 unlikely to make material difference: AM Best

Rating agency AM Best has explained that the expansion of named peril lists on reinsurance and retrocession arrangements at the January 2024 renewals, is not expected to make a material difference in terms of the risk covered.

Commenting on the reinsurance renewals from an insurance-linked securities (ILS) perspective, AM Best noted that the more balanced supply and demand in the reinsurance market has resulted in some concessions on the list of named perils covered.

At the January 2023 renewals, “Capacity providers made great efforts to movecontracts to a named-perils basis,” AM Best explained.

Adding that, as a result, “Deals were often limited to only two perils: earthquakes and named windstorms.”

But, at January 2024, with more capital in the market, AM Best noted that there has been an expansion of the named perils list, for some transactions at least.

“For themost part, reinsurers maintained the named-perils basis in Januarv 2024,” AM Best said. “But because supply and demand were more easily matched this year and certain deals were oversubscribed, brokers were able to push for limited compromises on terms.”

The rating agency further explained that, “In some cases, this resulted in additional perils being added to the named-perils list.”

But qualified that by saying, “However, attachment points have risen to such a degree that the inclusion of one or two more perils is unlikely to lead to a material difference in the risk covered.”

This appears to have been the most seen concession at the 1/1 renewals, as AM Best added in relation to terms and attachment points, “Aside from a few limited exceptions, capacity providers were unwilling to surrender prior year gains made on this front.”

The rating agency also said, “These conditions bode well for an ILS market in which investor and cedent interest in cat bonds remains high, despite a significant drop in loss multiples. And with respect to collateralized reinsurance, ILS managers plan to pitch the accomplishments of 2023 to potential investors during fund-raising in 2024.”

While the addition of some named perils to lists is indicative of the risk covered, it is not, of course, truly indicative of the risk being priced for.

While there has been some named peril expansion, it is a long-way from the shift to covering severe and convective weather in catastrophe treaties at lower levels in the tower that we saw in the past and there hasn’t been a major reversion back to providing aggregate coverage either, according to our sources.

But, it is a sign of what may be to come and once again, it is down to reinsurance underwriters and ILS managers to decide where the lines must be drawn.

To ensure they maintain a higher-level of return potential for their portfolios and don’t revert back to the terms seen back in the mid-2010’s, at the attachments that were in-force at the time.