By David Bull

March 19 - (The Insurer) - The April 1 Japanese catastrophe treaty renewal is set to be relatively stable with softening in the 10% to 15% range, while mid-year U.S. renewals are expected to be more challenging as buyers seek further reductions and reinsurers aim to hold the line following recent loss events.

This outlook reflects a range of conversations with senior reinsurance and broking sources in the last two weeks, including at the recent Bermuda Risk Summit.

On a panel at the event, Arch CEO Nicolas Papadopoulo stated that pricing for cat reinsurance at upcoming renewals needs to reflect the impact on the industry from January's California wildfires.

He said that cat excess-of-loss reinsurers are expected to take a $15 billion to $20 billion share of an estimated $40 billion to $50 billion industry loss from the event. That equates to a 30% to 40% loss ratio already in 2025, based on worldwide cat XoL market premium of around $40 billion to $50 billion.

“I think that in itself, we view, should be reflected in some of the pricing we see later in the year,” the executive said.

JAPANESE RENEWAL STABLE

However, there is a growing consensus that the scale of the industry loss for reinsurers will not have an effect on Japanese pricing as renewals are concluded over the next two weeks for the April 1 inception date on cat XoL programs.

Senior reinsurance underwriting and broking sources canvassed by this publication concurred that “moderate softening” is the expected outcome for Japanese buyers, with reinsurers characterising this as around 10% and brokers at 10% to 15%.

“The Japanese (insurers) feel they’ve been overpaying, and so want to make up (ground) after some of the rate increases they received over the past few years. The programs have been loss free, so fair enough,” said one senior reinsurer executive.

They also highlighted the view of Japanese cedants that the cost of their cat reinsurance should not be influenced by recent U.S. loss activity, including hurricanes Helene and Milton and the LA wildfires.

Another agreed with the direction of pricing, but suggested that the view cedants were paying too much was an “interesting perspective” after Japanese loss events wiped out premium two years in a row with Typhoon Jebi and Typhoon Hagibis in 2018 and 2019, respectively.

A senior broking source noted that some Japanese buyers are pushing up retentions, while a senior source from a reinsurer said that higher attachment points are combining with some additional demand for top-end limit on cat XoL towers.

An executive from a major reinsurer added that the decision to increase retentions is driven by a recognition that some of the lower layers on programs don’t make economic sense at the pricing level that is being charged by reinsurers.

Overall, the consensus for Japan is of a relatively stable renewal in line with the outcome for the broader global cat reinsurance market at January 1.

MID-YEAR NEGOTIATIONS FOCUS ON LOSS IMPACT

In the U.S., renewal negotiations are unlikely to see the same level of stability, however.

A senior source from an ILS manager told this publication that while a $35 billion to $45 billion wildfire event is unlikely to “suck enough capital out to move the entire market”, combined with 2024 hurricane losses there will be an impact on U.S. cat renewals.

For nationwide players renewing at April 1 or mid-year, the outcome will be dictated by the extent of losses ceded to reinsurers from the LA wildfires, with several carriers already publicly disclosing their expected recoveries under cat treaties.

Discussions will also be influenced by the extent of any losses from last year’s hurricanes that may have gone into cat towers. However, with high attachment points for nationwide carriers the impact will be more widespread for Florida specialists or other single-state and regional carriers with low-attaching cat programs that were hit.

There are a number of more heavily affected cat programs coming up for renewal, including Mercury General, which is yet to confirm to reinsurers whether it will be claiming its wildfire losses as one event or two under its treaty, after stating it expects to make significant subrogation recoveries.

The views of reinsurer and broker sources canvassed by this publication are more divergent when it comes to upcoming U.S. cat renewals.

Overall, the expectation is for a continuation of some of the softening trends observed at the January 1 renewal, when U.S. cat rates were seen as down in the single digits to 10% range for loss-free programs, but flat to up 15% for loss-affected deals, according to Gallagher Re.

However, one senior underwriting source noted up to seven of the top 10 companies affected by California wildfires renew their cat towers during the first half of the year rather than at January 1.

Loss-hit deals are expected to face double-digit increases in those lower layers that have been affected, but much more competitive softening conditions in higher up layers with double-digit decreases, especially where cat bond supply also comes into the equation.

Rates for loss-free nationwide programs are expected to decrease by 10% to 15%, however.

FRESH FLORIDA DEMAND

As well as the impact from 2024 hurricane season losses, the outlook for the key June 1 Florida wind renewal will be influenced by meaningful fresh demand for limit.

The Sunshine State last year benefited from a stable renewal with moderate softening. Gallagher Re estimated risk-adjusted rates on most programs were in the range of flat to down 10%.

This came as reinsurers became more comfortable with the sweeping reforms enacted in the previous two years, which had sought to address legal system abuse and other factors that had led to challenging operating conditions in the state for homeowners carriers.

For the upcoming renewal, cedants are expected to highlight the continued evidence of improved operating conditions as they seek further reductions.

Reinsurer sources have noted that there are already signs of initial loss picks from Hurricane Milton coming down.

Commenting on falling Milton loss estimates, a senior executive at a Bermuda reinsurer said: “That’s very positive with all the (legislative) changes that occurred – hopefully they don’t get rolled back.”

They added that there is an expectation that there will be additional limit purchased in Florida.

This will come from a combination of the industry attachment point of the Florida Hurricane Catastrophe Fund increasing, leading to additional demand below the cat fund, and fresh demand from the round of homeowners startups, including those depopulating Citizens.

Incumbents that faced two retention losses from last year’s hurricanes and have had to pay reinstatements are also expected to not look to retain more of the risk going into this year’s hurricane season, maintaining the level of limit they are buying on their towers.

Capacity for low layers, including those below the cat fund, has been relatively limited in the last few days, with only a handful of reinsurers pursuing the business, leading to elevated pricing.

In contrast, there has been a surfeit of capacity higher up programs.

At recent broker events focused on the Florida market, sources have said that there has been pressure from buyers and their intermediaries to push for further rate decreases.

Talking to this publication, a senior executive at another Bermuda reinsurer pushed back against this suggestion.

“Florida has had Milton and Helene as losses, so if they’re not reflected, I’m not sure how that works … so that’s led to a bit of a battleground.

“And then of course, you’ve got the wildfires, which shouldn’t influence Florida, but of course we’ve only got one pot of capital and one P&L, and if it’s impacted by the LA wildfires, then so be it,” they commented.