Hardest reinsurance renewal market in years to create knock-on impacts

Seismic shifts in the macroeconomic environment – combined with geopolitical uncertainty and heavy natural catastrophe losses – led to a severe tightening of capacity and a highly challenging period for reinsurance renewals on 1 January 2023.

High inflation, which has caused central banks to raise interest rates, has been exacerbated by war in Ukraine and the knock-on effect on energy markets.

According to the Office for National Statistics, UK inflation in January 2023 sat at 10.1% as measured by the Consumer Price Index.

On top of that, Hurricane Ian – which tore into the Caribbean and south-western USA in September 2022 – was just the latest in a significant run of natural catastrophe losses that have hit the market since 2017.

During that period there have been unprecedented levels of insured losses – many caused by secondary perils, such as wildfires, floods and droughts, which in turn are being impacted by climate change.

In addition, the effects of Covid-19 are still being felt around the globe, not least in the (re)insurance markets that took a large share of the $50bn (£41.3bn) in life and non-life losses stemming from the pandemic.

According to international broker Howden’s report on the renewals, these factors tipped the reinsurance sector into “significant volatility,” resulting in “one of the hardest reinsurance markets in living memory”.

This was intensified by a decline of $355bn (£293.4bn) in reinsurer capital in 2022, the first such fall since 2008.

The consequent environment at renewals led to the “most acute, cyclical price increases since the 2001-2006 period, if not before”, according to Howden.

Carrier costs of capital underpinned higher rates-on-line (ROL), lower capacity levels, and tighter terms and conditions, it added.

Knock-on impacts

Phil Nastri, partner at KPMG, said: “This has had a knock-on effect far beyond property and casualty providers because of the systemic impact on the reinsurance market as a whole.

“The result of this turbulent environment is significantly increased rates across the board and some longstanding reinsurance programmes undergoing major reconstruction.

“We’re also seeing a greater focus on more granular data from carriers about the risks being ceded, which is leading to longer renewal processes.

“Those feeling the greatest impact are some of the smaller players who have less economic power to leverage in a difficult market, especially those underwriting property risks exposed to extreme weather conditions.”

Nastri added: “With much less new capital coming into the market, property is bearing the brunt, particularly in North America.”

This scenario was made harder for (re)insurance companies as there were numerous issues on the asset side, which led to a year of poor earnings on the investment side.

(Re)insurers that invested heavily in bonds and fixed-income securities saw a decline in earnings due to higher interest rates.

In addition, inflation created a high degree of uncertainty around loss cost going into these renewals which, combined with high interest rates, had a significant impact on the January reinsurance renewals.

Catering for inflation

Mike Van Slooten, head of business intelligence for Aon’s Reinsurance Solutions, explained: “High inflation going into the renewals increased demand – a lot of buyers were looking to buy at least 10% more limit just to cater for inflation.

“The values to their insured portfolios increased because of inflation and they wanted to buy the additional limit to cover that. At the end of the day, however, many of them didn’t end up doing that because the pricing was too high.

“As far as the reinsurers were concerned, they were making some very significant demands, in terms of what is the impact of inflation on your underlying portfolio.

Reinsurers were keen to understand how each insurance company was managing its exposures, the quality of data used and how the insured values had moved over time.

Van Slooten added: “It was a hard market, one of the hardest markets for the last 30 years – certainly since 9/11.

“[In] property and catastrophe [markets], particularly in the US, there was a shortage of capacity and pricing went up significantly.

“Retentions also went up and that’s something that reinsurers were looking for because they’re trying to remove themselves from lower-level volatility caused by secondary perils.

There was a narrowing of coverage too – overall, there was a quite a significant shift of catastrophe risk back to the insurance market.”

According to Van Slooten, pricing on UK property and catastrophe business rose by around 30%, but from a relatively low level.

He added: “One of the things we have seen across Europe and in the UK for a long time is relatively low retentions – there hasn’t been a lot of loss activity.

”The rate on line (ROL), pricing at the top end of programmes, has been relatively cheap. Reinsurers are happy to write that cover because it diversifies with the US.

“What we saw at this renewal – and what will probably continue – is that the minimum ROL has gone up quite significantly.

“The reason for that is now that interest rates have gone up investors can earn a half-decent return on the asset side. So, why would you go and write top layers reinsurance at a very low ROL? It doesn’t really make any sense.”

Despite this, many London market reinsurers were able to maintain their market share during the January renewals – with carriers such as Beazley and Hiscox showing increased appetite.

Katia Ishchenko, director in the insurance team at Fitch Ratings, said: “Increases in rates in property reinsurance is an attractive opportunity for those London market participants that write reinsurance business and we have seen a number of London market insurers deploying additional capacity to write more reinsurance business – some insurers raised capital to take advantage of this opportunity.

“That said, we expect underwriting to remain disciplined in light of strong Lloyd’s market oversight over market’s catastrophe exposure.”