Berenberg foresees single-digit property cat reinsurance rate reductions

Unless there are big losses in the rest of this year, Berenberg expects property cat reinsurance rates to fall at year-end renewals in the low to mid-single-digit percentage range, but thinks that meaningful changes to programme structures, including attachment points, will be a no go area.

Following discussions with reinsurers at the Monte Carlo Rendez-Vous de Septembre, the investment bank also thinks that casualty reinsurance lines will come under pressure and that a growing number of reinsurers will utilise MGAs to provide direct cover for corporates.

“While it remains too early to make any firm predictions, and with the hurricane season still in full swing, we would expect that, in the absence of a big event, the market will be giving away some risk-adjusted rate across property natural catastrophe (nat cat) reinsurance, in the region of a low to mid-single-digit percentage, but for the sake of maintaining reinsurance programme structures,” said Berenberg on reinsurance renewals.

“In our discussions with the European reinsurers, the overarching message was that any meaningful proposed changes to the current structures of the programmes (which were painstakingly improved during 2023), including T&Cs and more importantly attachment points, are a ‘non-starter’; this appears to be a red line when it comes to most negotiations,” it added.

Berenberg said brokers are working hard to tempt reinsurers to relax terms, but reinsurance carriers clearly plan to hold the line. It said reinsurers stressed that “one swallow does not make a summer”. In other words, that 18 months of strong ROE’s are not sufficient to cancel out the sub-par years.

And Berenberg thinks that retaining the higher retention points and passing more risk on to insurers is important for the reinsurance industry.

“Given that the proportion of nat-cat insured losses retained by primary insurers versus reinsurers increased by 10ppt during 2023 versus the long-term average, we believe that it is as important for the reinsurers to maintain the current terms and attachment points as it is to maintain pricing, if not more so, particularly as insured losses from “secondary perils” now frequently average 60-80% of the total insured nat cat losses,” it said.

Berenberg also said discussions with reinsurers suggest that casualty lines – in particular US general liability, commercial motor and umbrella lines – will be under more scrutiny at year-end renewals. This comes amid increasing concerns about rate adequacy.

“The key concern for the industry is the deterioration in loss ratios across the 2014-19 underwriting years and whether, given recent social inflation trends, more recent underwriting years could also be affected. Overall, although reinsurers are not collectively withdrawing from casualty, the likes of Munich Re, Swiss Re, Hannover Re and SCOR remain cautious and are not looking to deploy additional capital into casualty in 2025. We would expect further upwards pressure on commercial pricing, as well as a reduction in ceding commissions,” it said.

Berenberg believes that the market is beginning to recognise the ability of MGAs backed by reinsurers to provide capacity to the primary commercial lines insurance market. It think this trend is likely to grow.

“For example, Scor’s experience of MGAs in the US has been positive. The reason we believe Scor’s experience has been positive is that providing capacity to an MGA allows the backing reinsurer to increase their underwriting exposure without having to compete for existing reinsurance business through brokers and possibly having to cut their pricing. This part of the reinsurers’ activity would, in our view, rank alongside the direct relation some reinsurers have with their primary insurance clients, where there is no intermediation by reinsurance brokers, and we estimate that for some reinsurers, direct underwriting accounts for as much as a third of their business,” it said.