RBC warns against tightening nat cat underwriting conditions

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RBC Capital Markets said natural disaster underwriting conditions are tightening significantly.

A new memo from the company says the industry has had little respite, with a lackluster loss experience since 2017, when hurricanes Harvey, Irma and Maria struck.

He wrote: “This contrasts with previous periods when losses normalized or were even mild in some years, allowing capital to regenerate. As we highlighted in the previous specialty name primer, the myriad of risk factors at play are driving this sustained period of rate hikes despite the absence of a capital shortage. Reinsurance market conditions, particularly for nat cat risks, appear to have tightened through 2022.”

The reason for rising catastrophe rates, writes RBC, is not so much the lack of availability of capital, but its deployment. This, the company said, is “more disciplined now.”

The company also predicted that reinsurance rates would tighten further.

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He wrote: “Rates are generally a lagging indicator of underwriting experience, as rates tend to react to loss trends. Still, cat rates have accelerated this year despite the cat loss experience being milder so far compared to previous years. Cat rates are up about 10% this year, the largest annual increase since 2012, and are outpacing both commercial and reinsurance rates.

RBC also drew attention to the current inflation rate, which is now over 9%. He said that while the insurance market is used to swings in interest rates, this is the first time in decades that inflation has been so high in major mature economies.

He wrote: “Insurers are wary of general inflation as they will have to adjust their pricing and underwriting to a new market environment. In highly exposed business sectors, (re)insurers applied double-digit loadings to account for inflation. Despite a deteriorating macroeconomic environment, general inflation trends do not show a direct historical correlation with claims inflation.

He added: “General inflation tends to have the most impact on short-term lines such as real estate and certain specialist risks. For long-tail lines, such as liability risks, social inflation is a more relevant driver than general inflation. Nevertheless, reinsurers have acted proactively to manage inflation risk exposure. In addition to incorporating inflation charges into renewal prices, reserves have been strengthened in some cases, while inflation-linked assets are also used to cover changes in inflation levels.

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