‘Calmer waters’ for reinsurance in 2024 signals innovation opportunity

“Calmer waters” resulting from “the gradual softening stage of the reinsurance buying cycle” at mid-year renewals is encouraging primary insurance players to innovate their reinsurance buying approaches following “hard” 2023 conditions.

With the 1/7 reinsurance renewals safely completed, insurers have noted that reinsurance buying in 2024 has reached an even keel after a challenging 2023, where rates were still being rocked by the Russia-Ukraine war, global weather events – including US-based hurricanes – and long-tail Covid-19 pandemic ramifications.

Russell White, chief executive of small commercial lines insurer Peach Pi, explained: “Last year, the market was quite hard in reinsurance. [There were] double digit rate increases on property [insurance, for example].

“This year’s certainly been a lot calmer waters.

“[In 2023], there’d been pushes to change and restrict cover – particularly around storm and flood terms – and this year, it didn’t feel that we’d got those same changes in cover going on.

“We hope that the current stable environment continues into 2025.”

A reinsurance buyer working within a large insurance group that has some North American catastrophe exposure, mainly around secondary perils, agreed with White’s perspective.

“We don’t see anything radical happening,” he told Insurance Times. “We’re into the gradual softening stage of the reinsurance buying cycle.

“After paying so much more at 1/1 in 2023, we didn’t see increases at 1/1 2024. Mid-year renewals in 2024 were flattish to slightly down.

“Reinsurers will continue to show discipline, not wanting significantly lower retentions or terms. The market is far from being in free fall, but there is some softening.

“Where we’ve seen rates come down, it’s been on the higher layers of US business. Outside of those pockets of softening, you won’t see the lower layers budging – they are unaffected.”

Aside from savings, an advantage of market softening from the buy-side is that it encourages innovation, providing the reinsurance sector with “the opportunity to look at the programmes they’re writing, to think of new and more efficient structures”, White said.

He continued: “When the market’s harder or in upheaval, people are just happy to renew. [But], when the market’s a bit more sensible, that’s when innovation and really considering the art of what we’re doing tends to come to the fore, which is great.”

Making changes

Agreeing with White, the aforementioned reinsurance buyer admitted that he was “looking at what we might do differently” amid the stable to softening conditions.

He explained: “We’re looking at a few new treaties. One of these is to buy political violence and terrorism (PVT) on a specific treaty basis, rather than within existing treaties.

“This represents a relatively small treaty, but something entirely new. Pricing in that market has been softening [on a primary insurance market basis], which seems antithetical to the state of the world, geopolitically, today.”

The buyer additionally noted that “it might be time to explore buying catastrophe aggregate cover again”.

He continued: “A number of large insurance groups are looking at buying catastrophe aggregate reinsurance protection.

“This was dropped in 2023 amid the turmoil of that year – it didn’t make economic sense to buy it.

“Reinsurers ran away from it and capacity got very tight. It’s a sideways cover, a bit of a ‘nice to have’ and many buyers decided to go net.”

There is appetite from reinsurers for this type of cover too.

The Reinsurance Market Dynamics report, published by broker Aon in July 2024, noted: “Today’s healthy reinsurance market presents opportunities for insurers to leverage reinsurance capital to support growth plans, manage volatility and alleviate capital constraints.

“At the mid-year renewals, reinsurers were more open to discussions on how to meet the needs of insurers’ property portfolios, with increased flexibility around attachment points and ancillary covers.

“On a selective basis, we are also seeing opportunities in property to address aggregate exposures, with growing interest in traditional sideways cover, as well as quota share and multiyear coverages in the structured solutions market.

“For reinsurers, there are growing opportunities to support insurers.”

White added that Peach Pi had used the mid-year renewal season to amalgamate some of its reinsurance contracts, combining programmes that initially renewed across 1/1 and 1/7 to now have just one mid-year renewal date instead.

“It was a merger of a big quota share arrangement into an excess of loss treaty arrangement, which was really good for us because it gave us immediately a boost in the perceived scale of what we could offer to reinsurers and has given us a more optimal rate and cover as well, which is great,” he explained.

Peach Pi has additionally sought to take on more risk itself as the business scales.

White continued: “Having a higher net retention any one claim means that we can do away with some of the bottom layers of our reinsurance treaties and take the risk ourselves.”

Capacity and capital

Aon’s aforementioned report estimated “that global reinsurer capital rose by $25bn (£19.5bn) to a new high of $695bn (£543bn)” in the three months to 31 March 2024, “principally driven by retained earnings, recovering asset values and new inflows to the catastrophe bond market”.

It added: “Capital is building quickly, prompting questions around deployment.”

Tom Wakefield, chief executive at Gallagher Re, agreed with this sentiment.

In the broker’s 1^st View: Balance Maintained update, published in July 2024, he commented that reinsurance buyers were experiencing a more “welcoming market” at mid-year thanks to reinsurers achieving “near record returns in 2023”.

This included exceeding 20% return on equity “in many cases”, he continued.

“This more comfortable market for buyers has been underpinned by sufficient supply of capital to meet rising demand as reinsurers’ balance sheets have expanded on the back of strong 2023 and Q1 2024 results.”

Meanwhile, credit rating agency AM Best, writing in its July 2024 The 2023 Reinsurer Class – The Class that Never Was trend review, added that the reinsurance segment was currently enjoying “risk adjusted returns not seen since 1993”.

With such upticks in capital, it makes sense that “there’s plenty of capacity in the [reinsurance] market”, according to the aforementioned reinsurance buyer, with “many reinsurers saying they can probably do a bit more with you in 2025 if the price is right”.

The buyer predicted that reinsurers’ buoyant capital will be put towards M&A activity.

He explained: “Conditions are rife for more consolidation among reinsurers.

“They will have the question of what to do with all that capital on their balance sheets. You either go out and buy someone or give it all to shareholders. Some of them will want to diversify.”

Bucking the startup trend

Despite the rise in reinsurance capital that typically follows a hard market, there has been an absence of new startup reinsurers.

Aon’s report concurred: “New startups continue to be notable by their absence, despite the attractive returns currently achieved, suggesting investors remain concerned about the challenging risk environment.

“There are competing alternatives for newly generated capital, notably increasing rewards to investors and franchise building via mergers and acquisitions. Activity can be observed in both areas.”

AM Best’s report also noted that an influx of startup reinsurers is expected during a hard market.

These startups traditionally aimed to “capitalise on the interruption in the reinsurance supply-demand equilibrium” – cashing in on the higher pricing that can be exacted from buyers.

AM Best continued: “Many of these new reinsurer formations merge or are acquired as the market cycle returns to the soft phase as the supply-demand equilibrium is reached at a lower price level after the new capital is used”.

However, the rating agency confirmed that reinsurance startups appear to be missing in action this year, describing the lay of the land as “noticeably devoid of new reinsurer formations”.

It said: “No new reinsurers were formed to capitalise on the turning market.

“This was not for a lack of effort or talented executives, as some high profile management teams publicly announced their intentions to form new reinsurers, while many more were rumoured to be seeking funding.

“Ultimately, none of the potential entrants have made it past the fundraising stage”.

White added: “New entrants and having new players come onto the market is really important.”

Competitive tension

Despite the overall positivity surrounding the mid-year reinsurance softening, buyers admitted to friction from the reinsurance market begins to turn in buyers’ favour, after nearly two years of reinsurers calling the shots.

White said: “What we have seen from some reinsurers in the past, when the market has been tough, is them being quite opportunistic and charging higher rates than the rest of the panel, or slightly more restrictive cover than the rest of the panel.

“You can do that when market conditions allow you to do that, but don’t be surprised if insurers, [when] they have the opportunity to, remove you or reduce your line in future when market conditions are more favourable.”

The reinsurance buyer added: “Reinsurers want to grow, so there’s competitive tension.

“We did see some reinsurers keep rates constant, so we will continue to keep the pressure on to find consistency in price, pushing on those reinsurers that have kept up higher than average rates within our programme.”