Signs of stabilizing reinsurance market for regionals navigating SCS challenges

US regional insurers including mutuals hit by severe convection storm (SCS) losses are facing a more stable property renewal amid signs of some returning appetite from reinsurers, including with the renewal of Guy Carpenter’s RAP facility, The Insurer can reveal.

Although there are no indications that reinsurers will alter retentions – a major pain point for carriers in areas such as the Midwest because of retained SCS losses – there is anecdotal evidence of renewed interest from some markets that had previously retrenched.

Sources said that Guy Carpenter’s RAP – or regional accounts program – has renewed after successfully adding new capacity from what have been described as financially strong markets. The facility provides access to reinsurance capacity for a large number of companies across 19 states.

And there are suggestions of incremental supply returning elsewhere to support the sector as reinsurers assess the work done by cedants to re-underwrite and reposition portfolios. These efforts are expected to drive improved performance as changes to rates and terms begin to earn through.

Multiple executives from reinsurers and reinsurance brokers canvassed by this publication have described a more optimistic atmosphere at the recent National Association of Mutual Insurance Companies (Namic) annual convention in Denver, Colorado last month.

While there are still plenty of challenges for those with SCS exposures – and concerns about the impact of social inflation on liability business – the overall sentiment was improved from a year ago, with more of a “glass half full” view than the “glass half empty” mentality previously on show.

The outlook for reinsurance renewals is also more promising, with a consensus that there will be a moderation in line with that experienced across the broader property cat reinsurance market this year.

Mutuals and other carriers with SCS exposure had faced circa 50 percent rate increases along with higher retentions at 1 January 2023, followed by further increases in the 10 to 25 percent range at this year’s renewal for those with losses, such that for some the compounded rate increase was as high as 80 percent.

At 1 January 2025 the expectation is that for loss-free accounts pricing may be down in the mid-single-digit percent range, with retentions holding where they are. Increases on loss-hit accounts are likely to be bespoke and individual to the cedant’s circumstances, rather than the blanket increases of two years ago.

“If you’re loss free and you’re doing the right things or perceived to be going in the right direction, reinsurers will maintain the retention and give you a little bit of a price break,” said a senior source.

Despite that incrementally more optimistic outlook, sources have said that returning appetite from reinsurers – especially for personal lines property in areas of the Midwest – is not a panacea, and continued surgery on the underlying portfolios is the only way to improve results.

“You can’t rely on reinsurance to solve your problems … retentions are not coming back down, the net retained volatilities at insurance carriers may moderate slightly, but in large part they’re going to remain the way they are right now.

“You can try to explore some parametric reinsurance, or other alternative forms of reinsurance, but at the end of the day there’s really not a free lunch out there. So the only alternative is to right-size your exposure to the capital you have available, both in your surplus and reinsurance,” said a senior reinsurance broking source.

Range of performance

Amid the issues around SCS and other frequency events as well as escalating loss trends in casualty – including auto liability – somewhat of a bifurcated market has formed, with a wide range of performance.

At an overall sector level, however, there is evidence of improved underwriting results this year so far compared to 2023.

The latest update to Namic’s The Mutual Factor report showed that based on statutory filings, mutual insurers booked a 103.6 percent combined ratio for Q2, a significant reduction on the 113.1 percent for the same period last year, despite overall H1 SCS losses of $39bn ranking second only to the record set in H1 2023.

The improvement comes after a full-year 2023 combined ratio for the mutual sector of 109.9 percent, with the Midwestern and Western regions experiencing the highest combined ratios at 109.0 percent and 110.6 percent, respectively. There was also a big difference between personal lines and commercial lines, with the former producing a 105.2 percent combined ratio last year, compared to 96.3 percent for the latter.

Reinsurer sources said that based on conversations with carriers there is some confidence that a meaningful percentage of cedants – perhaps around 40 percent – are currently on track to make an underwriting profit in 2024, subject to Q4 loss activity.

The rest, however, are already above 100 percent on their combined ratio, largely as a result of taking SCS and other frequency losses this year, along with impacts in other areas of the portfolio, such as auto.

One source suggested that even for carriers that are on target for profitability or break-even this year on their underwriting, the performance of property books is likely to be above a 100 percent combined ratio.

The difference in performance is in part a function of luck, with the localized nature of SCS events difficult to manage when carriers have geographical concentrations in their portfolios.

But it is also the result of actions taken by insurers to manage down risk.

Portfolio actions

The significant double-digit rate increases sought by admitted carriers – especially for personal lines business – are now beginning to earn through. Other actions are also having an impact, such as increasing deductibles, shifting to percentage deductibles, switching from replacement value to actual cash value on roofs, and adding exclusions to coverage.

The process for some carriers started back in 2023 in response to the frequency losses issue and the hard reinsurance market.

Sources offered a mixed view on the extent of the success of the measures.

“Part of our fear is that the industry hasn’t taken enough action … and as we get into 2025 there’s probably some number of carriers out there hoping and wishing that reinsurance can again solve their problems. But those taking that strategy are going to continue to suffer. The industry just has to take care of itself,” said one senior source.

They added that carriers still don’t have a margin of safety for when cats occur.

“The question is, going into next year, what’s going to solve the problem?” they continued.

But another senior reinsurance broker highlighted the significant progress made.

“Obviously we’ve had another heavy year for those kinds of frequency losses, but it’s also another year where the underwriting changes put in place are [having an impact]. We’re further down the road to those actually starting to earn through into results for these companies,” the executive suggested.

The state regulatory framework for the admitted market means it takes 12, 18 or even 24 months for changes to run through portfolios – in contrast to the much more rapid actions reinsurers can take in the face of deteriorating losses on a book of business or from an individual cedant.

But the broking executive said that the actions taken on rate, terms and conditions, and concentrations in portfolios should be given more credit by reinsurers.

“We’re coaching folks that they have to really share their story, and we’re also challenging the markets to say, ‘Listen, you’ve really got to listen to their story and make sure you understand where they are,’” they said.

This should help reinsurers differentiate between cedants rather than taking a broad-brush approach, they added.

Senior reinsurer sources suggested that they are increasingly differentiating between cedants, as they detailed some of the areas they look at when deciding whether to support a mutual or stock carrier operating in SCS-exposed territories.

These include the composition of portfolios between personal and commercial lines and property, casualty and auto; the exact geographical footprint; how quickly they can get rates approved; and how they monitor concentrations.

There is also a focus on the quality of data and systems at insurers and how that impacts their ability to quickly respond to challenges by shifting their portfolios.

And reinsurers are also looking closely at the specific actions taken to mitigate severity of losses through tightening terms and conditions.

Reinsurance solutions

In common with the rest of the property reinsurance market, the availability of frequency protection through aggregate covers as well as quota share has become increasingly scarce in recent years – at least at a price that makes economic sense for cedants.

Typically, reinsurance structures include covers such as property per risk excess of loss and catastrophe occurrence excess of loss.

Sources said some of those mutuals and regional carriers that have seen capital eroded by the volume of retained frequency have looked to issue surplus notes, or explore quota shares underlying excess of loss treaties.

Beyond traditional reinsurance, a number of other options are also being considered as carriers attempt to deal with earnings volatility.

“Whether it’s mutual holding companies, surplus notes, the exploration of creating captives, or whether its parametric covers or surplus relief type covers, or alternative risk with quota shares, all of these are being explored as the market is changing,” said a broking source.

But another added that while some of these structures can help provide capital and reduce premium volume for carriers, they are only a stopgap measure.

“You can instead lose premium by raising rates and losing policies … that’s really the only solution,” they said in reference to mutuals being able to right-size exposures in their portfolios.