Demand for property re/insurance will keep growing; but with some carriers planning to scale back nat-cat-exposed property lines in an attempt to curtail earnings volatility, unless a significant amount of capital enters the sector, it will be hard to be met, according to Berenberg analysts.
Swiss Re recently forecast that the $200bn demand for property reinsurance in the US alone will increase by 10-15% over the next 12-18 months.
At the same time, it has also been recently estimated that the natural catastrophe (nat-cat) protection gap widened by 8.2% to $368bn of premiums, with 76% of global nat-cat risks remaining uninsured.
Meanwhile, some nationwide US carriers and other European/Bermudian are talking about scaling back nat-cat-exposed property lines in an attempt to curtail earnings volatility, with climate change, higher reinsurance costs and claims inflation being the culprits, analysts explained.
They stated: “In our view, unless a significant amount of capital enters the sector, not only will the protection gap keep growing, but pent-up demand from existing business due to inflation and growing exposures will also be hard to be met. This suggests pricing both primary and reinsurance will need to stay higher for longer for capital to be enticed back.”
Berenberg highlighted that it is not often that large nationwide US carriers like AIG, State Farm, Nationwide and Farmers Group (part of Zurich Insurance) pull out of writing new property business – they have all said that they are now pulling back from climate and catastrophe-exposed property risks.
By making this decision, they are joining a number of other insurers that have either reduced or ceased offerings altogether in US regions – like New York, Delaware, Florida and California – vulnerable to floods, storms and wildfire.
“The main reason behind these dislocations appears to arise from many state regulators refusing to let insurers’ raises premiums in the admitted market (for example, only California allows premiums to rise in line with historical experience), which means underwriting these policies becomes unstainable from a profitability point of view, amid rising costs for reinsurance and elevated catastrophe losses,” analysts explained.
Moreover, reinsurers are also notably reducing exposure in some of these areas. Munich Re is the most notable example as it has decided to pull out of the Farmer’s reinsurance agreement, partly a result of inadequate/slow-moving pricing, Berenberg pointed out.
It concluded: “All in all, it is clear that prices need to be sustained higher for the (re)insurance property sector to be profitable. Moreover, given prices have structurally increased over the last 12 months, in our view reinsurers will be reluctant to give this up in this new environment.
“Overall, taking everything into consideration, in our view rates do not need to continue to increase significantly for profitability to remain high. Even if rates can be sustained at this new level of pricing, we think it could be more likely than not to achieve good results – and good results are needed to ensure sustainability of the sector going forward.”
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