US cat sees “material softening” in minimum rates-on-line: Gallagher Re

Catastrophe reinsurance pricing for programs in the United States is seeing “material softening” in minimum rates-on-line, broker Gallagher Re has said, as reinsurers “abandon” the need for top-layer pricing to exceed the risk-free rate.

While there are only limited US property catastrophe reinsurance renewals at April 1st, the broker notes that placements seen suggest a continuation of the moderation trend witnessed at January renewals.

All of which is playing out in the catastrophe bond market, where pricing for protection has softened over recent months.

“Capacity has continued to flow into the property catastrophe market, where capacity is sufficient to meet expiring and new capacity needs,” Gallagher Re explained.

Gallagher Securities, the insurance-linked securities (ILS) and investment banking broker-dealer arm of the broker noted the trend in the cat bond market through the first-quarter of 2024.

Saying that, “Cat bond risk spreads for most perils have declined 30% plus year-on-year but remain stable vs. Q4 2023 with growing capacity in dynamic balance with growing demand.”

You can analyse trends in cat bond risk spreads by year and by quarter in our chart.

While cat bonds generally place in the upper-layers of reinsurance towers, Gallagher Re noted that lower-layers are still more challenging for cedents.

“Cat pricing discipline continued at the bottom end of programs, where risk adjusted decreases were difficult to achieve,” the broker said.

While at higher layers, where the cat bond market is most prevalent, “We saw risk adjusted rate reductions at the top end of programs, particularly on capacity that was purchased new in the height of the hard market.

“We are seeing the end of “inverted pricing” where new top layers placed in the past couple years required pricing in excess of underlying layers.”

Gallagher Re sees the risk market as still firmer than property catastrophe placement for the United States, as capital has not flowed to that segment of the market as much as to pure cat risks.

“That said, across both risk and cat markets we are seeing material softening in minimum rates on line, as reinsurers abandon the requirement for top layer pricing to exceed the risk-free rate of return in US Treasuries,” stated Gallagher Re.