Moody’s report emphasises non-peak peril claims in 2023

The same week that California faced atmospheric river storms, a new report by Moody’s Investors Service revealed that while 2023 had a relatively quiet hurricane season, non-peak perils, such as severe convective storms, were a major cause of large losses suffered by US property and casualty (P&C) insurers last year.

Key takeaways:

• Non-peak perils have accounted for over 50% of global insured natural catastrophe losses on average over the past six years.
• A cohort of US homeowners insurers – including Allstate, Progressive, and Travelers – reported combined ratios well above 100% for the first nine months of 2023, while companies were already raising premium rates and coverage levels as a result of elevated construction costs, high catastrophe losses, and increased reinsurance costs.
• According to Moody’s RMS, the average annual losses in the US from severe convective storms – which are difficult to predict from a meteorological forecasting standpoint and unpredictable due to climate variability – are higher than the average annual losses from hurricanes.

The report noted ageing homes and higher population density in vulnerable parts of the US.

Primary insurers are also retaining more catastrophe risk as reinsurers have reduced their own exposures.

Report author Sarah Hibler, associate managing director, financial institutions, Moody’s Investors Service, said:

“Based on average aggregate modelled probable maximum losses for a sample of primary insurers across the US at the one in 10 year return period, primary insurers have retained more risk relative to their gross exposure since 2020.

“In contrast, many reinsurers have reduced exposure to higher frequency risks, particularly at the lower return periods. During the 1 January 2024 reinsurance renewals, broker reports suggest that more reinsurance capacity has entered at more severe loss levels (that is, higher up in the reinsurance tower), but reinsurers largely held primary insurers’ retentions stable.

“This year’s severe convective storms will reinforce the need to seek further rate increases and take other underwriting actions, such as tightening terms and conditions around weather related perils (percentage wind/hail deductibles in the Midwest).

“We do, however, expect premium growth to be slower in 2024 than in recent years, and coverage level increases are also likely to slow. Some companies have opted to exit states where they are not able to meet targeted returns.

“In response to growing non-peak perils, insurers are incorporating more recent experience into their modelling and pricing. Many homeowners insurers have continued to increase their catastrophe budgets.

“Insurers are also adopting or updating severe convective storms models, which are relatively new compared to hurricane and earthquake models. Some insurers add loadings to their modelled results to reflect the possibility of higher losses, although this is a relatively blunt tool. Over time, we expect further progress in modelling these complex events