Insurers Are Facing a Steep Rise in Reinsurance Rates

It is too soon to know if the reinsurers will get what they want. Carriers might buy less reinsurance to limit the increase in cost, taking on more risk themselves and possibly limiting premium increases they would pass on to their customers. Insurers have already been boosting premium rates on their business, homeowner and auto policies to deal with higher costs due largely to inflation.

Reinsurers are reacting to five years of outsize catastrophe losses and growing worries that climate change is intensifying the risks from storms and wildfires, among other concerns. Hurricane Ian, which killed more than 130 people, is estimated to cost insurers from $40 billion to more than $70 billion, making it the nation’s second most-expensive natural disaster for the insurance industry. Hurricane Katrina cost more than $90 billion in today’s dollars. 

Despite the big cost, large publicly traded property insurers came through Hurricane Ian on solid financial footing, based on their third-quarter reports. Their earnings were badly dented, but

Moody’s

Investors Service notes that they have considerable resources to draw on. Dozens of mostly privately held, small- to midsize Florida-focused insurers will soon be filing detailed quarterly statements to regulators. Meanwhile, subtropical storm Nicole might slam the state’s east coast later this week, possibly adding more disaster claims.

Many of the large national carriers, and all of the Florida-specific ones, rely on reinsurers—a globe-spanning community of giants like

Munich Re,

Swiss Re,

SREN 0.27%

Lloyd’s of London and

Berkshire Hathaway Inc.

BRK.B 0.95%

and smaller players—to take on some of the risk of the policies they sell.

Reinsurance limited insurers’ losses from Hurricane Ian. Car and home insurer

Allstate Corp.

ALL -0.23%

said its Ian-related estimated gross catastrophe losses totaled $671 million pretax, but reinsurance reduced what it will pay by $305 million, down to $366 million.

Allstate Chief Executive

Thomas Wilson

said the price increases being sought by reinsurers are due to their recent losses, worries about climate change and the dollar’s recent strengthening, which hurts some reinsurers because they sell coverage in U.S. dollars yet hold their capital in another currency.

“The combination of those three things will make for a really tight reinsurance market,” Mr. Wilson said. “It seems likely to me that the price will go up next year.” Allstate won’t face the hit all at once because its reinsurance program staggers renewals over three years, he said.

Rapidly rising interest rates are also hurting reinsurers. Higher rates reduce the value of the bonds they hold. If the companies face payouts, for example from a quick succession of major hurricanes, they might have to sell some of their bonds at a loss. The inflation being experienced by carriers is driving up reinsurance prices, too. 

With so many issues stacked up, “this is really the most challenging renewal year probably since Katrina,” said

David Flandro,

head of analytics of Howden Group, a London-based broker. In the January 2022 renewal period, year-over-year property-catastrophe reinsurance price increases worldwide came in at 9%, according to Howden data. 

Reinsurers haven’t been shy about the price increases they anticipate. Swiss Re’s Group Chief Financial Officer

John Dacey

said in an Oct. 28 earnings call that “prices will not show some sort of an evolutionary adjustment, but rather a fairly radical adjustment up.”

Across the U.S., “they’re definitely bracing for price increases,”

Chris Dittman,

executive managing director and Florida-segment leader at Aon Reinsurance Solutions, said of the firm’s insurance clients.  

This summer, Florida-focused home insurers went through their renewal period with prices going up 25% to 30% in many instances, according to ratings firm Demotech Inc.

One uncertainty is what happens with the market for catastrophe bonds, which are an alternative to reinsurance. When interest rates were low, pension plans, endowments and other institutional investors bought catastrophe bonds for reasons including boosting returns. With rates higher now, investors could lose their enthusiasm for these securities.

If large numbers of investors abandon the cat-bond market, the trend would help drive reinsurance pricing higher, brokers and analysts said.

Before Hurricane Ian, 2022 had been a relatively mild year for U.S. insurers. Reinsurers, which face global risks, have had a tougher year. There were unusually fierce winter storms in Europe, unprecedented flooding in Australia and South Africa, and severe heat waves that sparked forest fires in southwest Europe, according to Swiss Re.  

Write to Leslie Scism at leslie.scism@wsj.com