Creative solutions needed to address secondary perils coverage challenge
It is becoming economically unviable for primary perils to continue to subsidise secondary perils
Warnings of lower layer capacity crunch at January renewal unless brokers look at alternative structures for dealing with secondary perils
Brokers will need to be “creative” in how they structure property catastrophe programmes at the January 1 renewals or cedants will struggle to obtain capacity for lower layers of coverage, reinsurers said.
The warning comes amid expectations of significant rate increases at the January 1 renewal to reflect the cost of secondary perils.
The reinsurance market has been grappling with the impact of secondary perils, such as hail and flood, which have, historically, not been adequately priced in programmes.
With sizeable secondary peril losses in the past year, this had led to capacity shortfalls in recent renewal rounds, as reinsurers have backed away from providing cover.
Speaking to Insurance Day, Patrick Hartigan, group head of treaty at Beazley, called on brokers to look at alternative structures for dealing with secondary perils or lower layers of cover would not be available at the January 2023 renewal.
He suggested covers could be “bifurcated” with primary perils split from secondary perils, which could then be covered on an aggregated basis rather than an occurrence basis.
“The problem is primary perils have subsidised secondary perils and that has got to a level where it is becoming economically unviable,” he said. “If you go to low attachment levels, it is not economical, as you are just exchanging dollars, and no one gains apart from the brokers.”
Hartigan said cedants need to accept they must pay for secondary perils coverage or they will need to be protected in a different way.
“Something needs to change otherwise what we saw in Florida could play out in other areas and companies won’t be able to obtain cover,” he added.
Florida buyers faced rate increases above 50%, as a lack of capacity and reduced reinsurer appetites challenged the marketplace at the mid-year renewals, while pricing reached “distress levels” on some Australian reinsurance placements, brokers reported.
Hartigan said there needed to be an overall “technical” rate increase of 20% at the January 1 renewal, although “supply and demand” considerations would impact that.
“If there is a benign hurricane season it won’t change that. What will change things is if there is a major secondary perils loss which models didn’t take into account,” he said.
Such a situation could lead to a “very significant rethink” in pricing, Hartigan added.
The re/insurance market has been hit by a number of mid-sized secondary peril losses in recent months. These include record-breaking flood in Australia, which could cost around A$5bn, hailstorms in France, wildfires and a derecho in Canada.
Last year, European windstorm Berndt caused substantial flood losses over more than $13bn, predominantly in Germany and Belgium.
Rising natural catastrophe losses and concerns about climate risk and secondary perils have led to a number of reinsurers to exit the property catastrophe market or significantly reduce their risk appetite. This has led to difficulties for cedants in secure capacity at the mid-year reinsurance renewals.
Brokers were optimistic that solutions will be found to the capacity challenges in the property catastrophe market.
“On the surface this may paint a grim picture for 2023 property renewals but we are confident the industry will come together to provide solutions,” Lara Mowery, global head of distribution at Guy Carpenter, said. “There are a number of reinsurers planning for growth in their property portfolios, some of it significant.”
Mowery said reinsurers would be focused on coverage and price adequacy. "Modified product offerings can be a factor as more exposed lower layers and aggerates come under pressure. It may be more beneficial for a cedant wanting expanded limit to shift the amount of capital in terms of bottom end capacity to gain more coverage overall.”
Joe Monaghan, global growth leader at Aon’s Reinsurance Solutions, said reinsurers will prioritise cedants that provide detailed exposure data and demonstrate underwriting actions that mitigate areas of uncertainty.
“All parties will need to be pragmatic, flexible and open-minded to different solutions and trading relationships,” he added.