New research findings have indicated that some re/insurers may discontinue their risk coverage from the property catastrophe space in 2022 due to rising frequency and severity of secondary perils that are adding pressure to margins, leading to greater diversification towards other classes of business
A report by Peel Hunt, a United Kingdom-based boutique investment banking firm, indicated that despite several years of rate increases, a notable rise in losses from secondary perils such as floods, wildfires, and convective storms had fuelled debate around the capabilities of risk models, but also whether rates are adequate in this part of the business.
Noting that of course, many of the world leaders met in Glasgow recently at the COP26 conference, the investment firm’s analysts believe that the type of agreements required to meet previous climate targets set by these same governments failed to materialise.
According to the analysts, the outcome of COP26 “is unlikely to address the concerns” of the risk transfer industry about the rising frequency and severity of secondary perils in the short-to-medium-term
They also say that the big question for insurers and reinsurers now is how they intend to navigate this heightened earnings volatility
The experts further noted that large majority of re/insurers have now released their Q3 and 9M 2021 financial results, which were impacted to varying degrees by hurricane Ida in the U.S. and the European floods in July, the latter of which has been strongly linked to climate change.
According to industry market data, owing to the elevated loss experience and the fact that reinsurance rates in related classes, while on the rise, have failed to improve enough to offset the new loss experience, some firms have discussed a retreat from the property cat space.
Noting this industry trend, analysts at Peel Hunt say that the “aim is to diversify the (re)insurance portfolio towards non-catastrophe classes and to gain more exposure to the better rates in the primary market via quota share treaties, with the aim of reducing earnings volatility.”
Although some players appear committed to pulling back from the property cat space in the current environment, others are prepared to take advantage of expected rate improvements at the January 1, 2022 and not retreat.
The researchers further maintained that after all, “It is increasingly likely that property catastrophe (re)insurance rates will regain upwards momentum again amidst increasing uncertainty around rate adequacy.”
So, while rates are expected to rise further at January 1st, it’s still unclear how the supply/ demand dynamics of the property cat space will be, leading some to feel optimistic about the potential opportunity ahead.
Industry analysts also noted that for the primary market, there’s a risk that carriers retain more property catastrophe risks, particularly for secondary perils, if they are unable to cede this to reinsurers, adding that “it is not obvious that third-party capital will rush in to fill the gap.”
In the current market landscape, analysts at Peel Hunt believe that underwriting quality across the reinsurance sector is likely to improve in 2022 as underlying margins begin to see the benefits from four years of rate improvements.
This is even as they expected this trend to improve loss absorption through earnings, noting an outlook for ROEs of 12% on a risk-adjusted basis next year.
The analysts projected: “As such, we believe the specialty (re)insurance sector is attractively valued and we are starting to see some attractive long-term opportunities.”