Insurers Will Be Paying More for Reinsurance Next Year

The hurricane season is coming to a close, but there is still one more storm that could potentially hit Florida. For insurers, the worries won’t end on Nov. 30.
Insurers are currently in negotiations with reinsurers, who are seeking to increase rates by 10% to 30%. Nearly two-thirds of all property-catastrophe coverage in the United States renews each January 1st, including for many large diversified insurers in the US and Europe.

It is still unclear whether or not the reinsurers will get what they want. Carriers may choose to buy less reinsurance in order to limit the increase in cost, taking on more risk themselves and potentially limiting premium increases that they would otherwise pass on to their customers. Insurers have already been boosting premium rates on their business, homeowner, and auto policies to deal with higher costs due largely to inflation.

Reinsurers are reacting to five years of outsize catastrophe losses and growing worries that climate change is intensifying the risks from storms and wildfires, among other concerns. Hurricane Ian, which killed more than 130 people, is estimated to cost insurers from $40 billion to more than $70 billion, making it the nation’s second most-expensive natural disaster for the insurance industry. Hurricane Katrina cost more than $90 billion in today’s dollars.

Despite the high cost, large publicly traded property insurers weathered Hurricane Ian relatively well, based on their third-quarter reports. Their earnings were badly dented, but Moody’s Investors Service notes that they have considerable resources to draw on. Dozens of mostly privately held, small- to midsize Florida-focused insurers will soon be filing detailed quarterly statements to regulators. Meanwhile, subtropical storm Nicole could potentially slam the state’s east coast later this week, possibly adding more disaster claims.

Many of the large national carriers, as well as all of the Florida-specific ones, rely on reinsurers. These are large companies that provide insurance to other insurers in case of losses. Some of the biggest reinsurers in the world include Munich Re and Swiss Re.

Lloyd's of London and Berkshire Hathaway Inc. are two of the world's leading insurance companies. They have a long history of providing high-quality insurance products and services to their customers.

Insurance companies often spread out the risk of the policies they sell by working with larger and smaller players. This helps to protect the companies from losses if a policyholder files a claim.

Reinsurance helped to limit insurers' losses from Hurricane Ian. Car and home insurer Allstate Corp. was one of the companies that benefited from this type of coverage.

The company said that its estimated gross catastrophe losses related to Hurricane Ian totaled $671 million pretax. However, reinsurance will reduce the amount the company will pay by $305 million, resulting in a net loss of $366 million.

Allstate's CEO, Thomas Wilson, has stated that the recent price increases being sought by reinsurers are due to their recent losses, as well as worries about climate change and the strengthening of the US dollar. The latter issue hurts some reinsurers because they sell coverage in US dollars but hold their capital in another currency.

According to Mr. Wilson, the combination of those three things will make for a really tight reinsurance market. He believes that the price is likely to go up next year. Allstate won't face the hit all at once because its reinsurance program staggers renewals over three years.

Rising interest rates are hurting reinsurers. Higher rates reduce the value of the bonds they hold. If the companies face payouts, for example from a quick succession of major hurricanes, they might have to sell some of their bonds at a loss. The inflation being experienced by carriers is driving up reinsurance prices.

This is shaping up to be one of the most challenging renewal years since Hurricane Katrina, according to David Flandro, head of analytics at Howden Group, a London-based broker. In the January 2022 renewal period, Howden data shows that year-over-year property-catastrophe reinsurance prices increased by 9% worldwide.

Reinsurers are expecting significant price increases in the near future. Swiss Re’s Group Chief Financial Officer John Dacey said in an Oct. 28 earnings call that prices will increase significantly, rather than just adjusting slowly over time.

Chris Dittman, executive managing director and Florida-segment leader at Aon Reinsurance Solutions, said that across the U.S., his firm's insurance clients are definitely bracing for price increases.This summer, home insurers in Florida saw their prices increase by 25% to 30%, according to ratings firm Demotech Inc. This price hike comes as a result of the renewal period for many insurers.

One uncertainty in the market is what will happen with catastrophe bonds. These bonds are an alternative to reinsurance, and when interest rates were low, pension plans, endowments, and other institutional investors bought them in order to boost returns. However, now that rates are higher, these same investors could lose their enthusiasm for these securities.

If a large number of investors were to abandon the cat-bond market, it could help drive reinsurance prices higher, according to brokers and analysts.

This year has been relatively mild for U.S. insurers, but reinsurers have had a tougher time due to global risks. There have been unusually fierce winter storms in Europe, unprecedented flooding in Australia and South Africa, and severe heat waves that sparked forest fires in southwest Europe, according to Swiss Re.