Equity analysts from investment bank J.P. Morgan came away from a recent visit to companies in the London insurance and reinsurance market with the impression that underwriters feel there is plenty of headroom left in the higher attachment points still installed across the sector, despite inflationary influences on losses.
“We came away from the tour with the feeling that the market is still in a good place; rates might be starting to weaken but they remain at highly adequate levels with the potential for strong ROEs for at least the next couple of years,” the analysts said.While pricing trends are slowing across reinsurance, the J.P. Morgan analyst team note that they remain at “very healthy levels”, saying that while reinsurance softened through 2024 “the picture remains positive overall.”
“While there was a softening in price, it was considered that terms and conditions remained robust and attachment points were still at attractive levels,” the analysts reported.
Saying, “We had been slightly concerned about whether the material improvement in attachment points had been eaten away by inflation but we came away reassured that there is still plenty of headroom before the increase in retentions disappears.”
As a result, the London market insurance and reinsurance constituents that J.P. Morgan’s analyst team met with are largely confident that attractive underwriting opportunities exist.
“The view was almost universal that given the rate adequacy of pricing, there were likely to still be opportunities to grow and expand portfolios in 2025,” the analyst team explained.
The analysts highlighted in their report, that some attachment points do get adjusted for inflation, which tends to result in further upwards movement given the general inflationary trajectory seen around the world.
This resulted in attachments being “broadly flat in nominal terms” at the 1/1 reinsurance renewals and the majority are still at healthy levels, despite any inflationary influences.
The outlook for April 1st reinsurance renewals in Japan and South Korea had always been for a continuation of January’s softening trend.
It seems that in some cases the Japanese rate softening has been perhaps slightly faster than January, with some layers of towers seeing rate decreases in the double-digits, but overall we’re told the perception is that attachments have largely held again and some have been adjusted for inflation.
J.P. Morgan’s analysts said that the sentiment in London during their recent visit was that the recent wildfires might dampen price softening at the US renewals at the mid-year.
As rate-on-line stagnates, or softens, it’s going to be incredibly important for underwriters to take into account the effects of inflation on exposure and therefore ensure attachments are being kept at sufficient levels.
It would be very easy to allow for the effective attachment points to come down, as a lever for sustaining more rate per unit of risk in property catastrophe reinsurance renewals.
But the market has been there before, in the last softening cycle through the early to mid 2010’s, when there was little control of attachments and terms or conditions that in some cases caused meaningful increases in the probability that reinsurance layers attached.
While there may be plenty of headroom in attachment points at this stage and the market has appeared disciplined on this front, it’s important that other terms and conditions are not weakened to the degree that attachment risk rises unduly, while underwriters and insurance-linked securities (ILS) managers also need to keep a grip on inflation.
So many factors go into deriving a probability of attachment, for a reinsurance layer or an instrument such as a catastrophe bond. Inflation can undermine attachments if it’s not properly measured, considered and factored in.
But it’s also key to capture all forms of inflation, through the exposure base but also in the economy and how each can affect claims quantum, development and follow-on costs that can drive claims higher such as rebuilding.
While headroom still exists at this time, there’s no guarantee it will remain in a year or two’s time if the market becomes increasingly aggressive and competitive at renewals, or falls back into its old habit of placing the importance of securing volumes higher than sustaining profitability.
