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Goldman Sachs forecasts 35% property cat rate-on-line increase

Goldman Sachs has said that it is estimating a +35% increase in global property catastrophe reinsurance rates-on-line (RoL).

This would, said the firm, be the strongest RoL increase since the early 1990s (+65% in 1993), which it said would surpass the +26% averaged in 2001-2002 post-9/11.

The financial giant gave several reasons for this, saying that Hurricane Ian was a factor in what it said was already setting up to be ‘a challenging renewal’ following property inflation and increased weather losses.

It wrote: “Hurricane Ian is expected to be ~$50bn industry loss, adding to annual global insured catastrophe losses since 2017 of >$110bn, which has increased ~60% versus the prior decade average of ~$70bn. These losses are causing (re)insurers to question the accuracy of catastrophe modelling capabilities and factor in the increasing prevalence of secondary perils such as wildfires and flooding.”

The hurricane, wrote Goldman Sachs, is particularly challenging to the Florida market, saying that it added adding trapped capital and potential solvency issues on top of a state with an already troubling property CAT environment driven by litigation and insurance fraud.

Meanwhile, on the casualty side, the firm said it expected to see high-single-digit pricing stemming primarily from inflation, a factor that it said appears to be impacting longer-tail claim costs such as medical care and legal services.

It added: “The current macroeconomic and geopolitical risk also lends itself to increased underwriting scrutiny and caution. Cyber (re)insurance in particular should experience increased pricing and penetration. AJG management expects 60% of its high-risk casualty book to face a difficult renewal season.”

It also said that inflation was likely to drive a more-than 20% price increase for property lines by itself, while it and social inflation is looking to drive most casualty pricing increases.

It added: “Capacity is broadly available Europe: While we expect supply pressures to be more pronounced in the U.S., industry commentary points to capacity availability in Europe broadly, partially stemming from the lack of an exceptionally large industry loss in 2022, such as that of Hurricane Ian in the U.S. As such, we expect European Property NPW growth to nearly match U.S. growth, as price increases of ~26%+ (GSe) are partially offset by higher risk retention by insureds, but lower reinsurance capital is not an impediment.”

There were, wrote Goldman Sachs, a few negatives for organic growth, including reduced capacity, increased risk retention, and reinsurance brokerage revenue structure.

On the first, it said that this would primarily be focused in the US. It wrote: “Through mid-year 2022, global reinsurance capacity decreased 11% principally driven by substantial unrealized losses on investment portfolios. Additionally, consensus is building around the potential for ILS fund capital to be trapped by Hurricane Ian in the $15-$30bn range, plus a low-single-digit billions impact to the $15bn Retrocessional (retro) market, which can have further implications for reinsurers’ willingness to deploy capital.”

It added: “However, we also note several reinsurers highlighting increased willingness to participate, or increase participation in, the property reinsurance markets given expectations for higher expected returns. Ultimately, we do believe that forces for capacity reduction will be stronger than new supply, and are considered when we model pricing increases previously discussed. A capacity reduction at 1/1 2023 from YE21 levels would represent a decline for the first time since 2018 (according to Aon).”

Around an increase in risk retention, Goldman Sachs said: “When prices rise, insurers are faced with difficult decisions around the amount of reinsurance coverage they will buy. When there are increases of material magnitude as we expect in 2023, this scenario often leads to increased risk retention from insureds, which can serve to dampen industry NPW growth. That said, we expect offsets in the demand for reinsurance given persistent inflation and increased weather. We expect increased risk retention for Property lines broadly (primarily U.S.) but do not see this impacting casualty lines in total.”

And on reinsurance brokerage revenue structure, it said: “While reinsurance brokerage is primarily a commission-based business, and we expect commission rates to stay stable, there are offsets in the form of commission rebates to customers and negotiated fees; particularly when pricing is high. This structure causes reinsurance brokerage to be less dependent on pricing than a pure commission business – which is favorable – yet less beneficial when prices are expected to be at highest in three decades.”

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