The U.S. real estate cat market is gearing up for a controlled descent

For once in Monte Carlo, the risk of real estate catastrophe is out of the spotlight, although the (probable) appearance of Hurricane Francine on Tuesday is a reminder of the dangers that lurk.

There are some potential points of fracture in the cat market conversations around the issue of frequency vs volatility and the balance of risk sharing between insurers and reinsurers.

Some brokers have stepped up their language about the need for reinsurers to take on more risk, while reinsurers have remained firm in their view that higher retentions have returned them to their true role.

However, many saw these skirmishes as an exercise in rhetoric and suggested that – in the absence of a major cat loss – the market is lined up to expect a slight decline in the US cat risk rate, with more reluctance to regarding return terms and conditions. coverage.

With the RoE for cats’ treaty books in the 30% range, reinsurers believe there is room to drop the rate while making a margin that offsets volatility.

Many point to the number of years they have not met their cost of capital as a requirement for returns to remain particularly high in benign loss years.

However, there are regional differences. Reinsurers are in risk mode for the US cat at good prices – and there may be a test of skills here to continue growth while maintaining discipline as placement oversubscriptions increase in 2025.

The same is not true in Europe, where reinsurers believe that pricing for loss-affected cedants has not gone far enough. There are pockets where insurers didn’t pay out in full last year or escaped the magnitude of retention increases elsewhere. Medium-sized cat losses in Germany and late losses following last year’s Italian losses will spur reinsurers to be more disciplined.

Despite the gap between broker/reinsurers talking points on taking on lower volatility risks, some reinsurers are willing to offer global or higher risk deals – though not old-style earnings protection deals. However, the current price gap between their offer and what buyers are willing to pay is highlighted by Allstate’s mid-year failure to land a global deal.

While the supply/demand situation is broadly balanced, some market watchers lamented that talk of a rate cut in 2025 could further dampen new capital inflows or cause investors to take some cash off the table at the end of the year.

There is no perception of a lack of capacity, but at the same time, the lack of recent start-ups and prolonged fundraising challenges for those bringing new capital to the market show that existing capital is where it’s at for 2025.

Cat bond market supply will be boosted by about $2.5 billion in maturities in the second half, according to data from Insurance Insider ILS. If new bond issues fail to keep up with the frenzied volumes completed in the first half, this could provide some relief from the competitive strain.