“We’ve got climate anomalies, people are continuing to pull out, and we don’t really know how much capital has been raised, and yet, for some reason, people are saying there’s rate softening, which I just don’t understand,” said Adderley, in an interview with Artemis.

This May, Canada experienced its worst wildfires in the month, which were so bad that they impacted flights in New York. There’s also been record flooding in Italy this year, and with the Atlantic hurricane season underway, there’s ample uncertainty around activity as a result of warmer than average sea surface temperatures.

In any year, the number of catastrophic events and the financial impact of these is inherently uncertain, but the fact is that in recent times, more than $100 billion in annual re/insured losses has become the norm.

Elevated losses from large catastrophes and so-called secondary perils are one of the key drivers of rate hardening in the global reinsurance market, notably for cat-exposed business, but have also contributed to dwindling appetite for certain risks from primary insurers and reinsurers.

Against this backdrop, Adderley explained that it’s “interesting there’s been references to pricing softening.”

“It’s a disappointing comment because one could argue that over the last six years or so, one renewal season does not make up for your losses that have occurred since. It’s hard to see how that would be the case.

“I personally don’t think the pricing has got to where it needs to be. Over the last 20 years, how much inflation has there been? And then how much have people lost in these cat-prone areas over the same timeframe?

“So, how much do you actually have to raise rates by to cover all of the money you’ve lost over say just the last eight years? It’s a lot,” he added.

In spite of some commentary suggesting rate softening, the reinsurance market remains hard, but interestingly, this hasn’t driven significant capital raising from existing players or led to the emergence of new ones.

“Currently, investors don’t believe in the market. That’s why they haven’t been flooding into the market to take into this better pricing and better terms,” said Adderley. “And, with more climate change and inflation, it’s clear that investors either no longer like the risk, fear it, or they just can’t price it because of what’s going on in the world.”

It feels like a very important time for the risk transfer industry as a whole, and it will be interesting to see if more players pull out of key markets and whether more capital enters the sector, and what this does to supply demand dynamics and ultimately rates ahead of the January 2024 renewals.

What is clear, though, is that catastrophe bonds, which attach at a high limit, remain attractive as a source of reinsurance and retrocession.

“Just going by the facts, we have probably done more cat bonds than we’ve done for a long time – it’s constant,” said Adderley.

Whether this trend persists through the rest of the year remains to be seen, but regardless of cat activity in the second half of 2023, it’s certainly going to be a very interesting year for the marketplace.

Click here to view the full report.

First Published In Artemis, July 2023

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