During the 2024 PwC Insurance Summit in Bermuda, Rob Bredahl, Vice Chair of Howden Re and Exec Chair of Howden Capital Markets & Advisory had a fireside chat with the Financial Times’ Senior Markets Correspondent Ian Smith about the Property and Casualty hard market and what we can expect in 2025.
Bredahl discussed whether Hurricane Milton could lead to an extended hard market through large insured losses, what the market should expect for capital flows in the hurricane’s wake, and how “black swan” events could impact investor psychology.
2025 Outlook
“Without Helene and Milton, there would have been a very noticeable soften in the market,” said Bredahl. “So, I think those events sustained current pricing but just, there’s going to be some downward pressure.”
Currently, Hurricane Helene’s losses are projected at about $8.5bn while Milton was estimated at about $33bn but PCS estimated $5bn in losses.
Bredahl said cat reinsurers are expected to make money this year, as that lower estimate will be “critical” for when cat bonds payout as he suspects the PCS estimate will come up while the rest will go down.
“Total insured losses, globally, from cat events are around $140bn, which is up from $120-$125bn last year, and that’s not too far off modelled expected losses,” Bredahl said.
This is coming off last year’s record amount of retained earnings, where he said the average cat balance sheet retained 30% or more. Bredahl describes those retained earnings as “an avalanche of capital.”
He said the only thing that will sustain pricing is the discipline of the reinsurers while less supply is entering the market.
Black Swan Events
Bredahl believes that “black swan” events, like Helene and Milton, will help to sustain pricing. Both storms could have ended very differently and were historic in their own rights, Bredahl said this will give management teams, boards of directors, and investors pause in future projections.
He said the current “cloud over the industry” is whether unease about climate change and future events will hamper new capital, even with a very profitable year for the reinsurance industry.
After two successful years in a row, Bredahl said it’s hard to imagine that reinsurers will drop pricing in general.
“The Black Swan, the odd events, probably on the back of provable global warming and then just needing to earn back some of what was lost over seven years, I think, will keep pricing flat to down a little bit this year,” said Bredahl.
Nuclear Verdicts
When it comes to legal inflation and legal system abuse in casualty, Bredahl said there’s an attitude in the United States to “stick it to big corporations.”
“Unless there’s real reform, the only thing insurance companies and reinsurers can do is to push on price and terms and conditions,” said Bredahl. “Because of that, you’re seeing a lot of business fall into the ENS market, and it has traditionally, but it’s not flowing back, and I don’t think it will.”
Bredahl said this results in very expensive but poor coverages due to the legal system.
“One thing everybody in this room can do is talk to regulators and talk to politicians, we need reform,” Bredahl said.
Across the board, Bredahl said he’s seen insurers and reinsurers put down smaller limits to diversify more, where if there’s “legal wrangling,” they can toss their limit.
He said this results in two unintended consequences: writers of liability business don’t stand out from each other and payout patterns are rapid, causing a big spike in early payments. Plus, the lack of uniqueness in writing liability is preventing a big-limit writer from emerging from the pack.
“Litigation funds have a lot to do with these nuclear verdicts, there’s lots of money to pursue crazy lawsuits,” said Bredahl. “I’m a capitalist but I’m not sure if we should be funding lawsuits. I think it leads to really bad behavior.”
You can watch the full fireside chat here: PwC2024 FTInterview
