How are insurers preparing for potential cost shocks of upcoming reinsurance renewals?

For many insurers, the reinsurance renewals on 1 January 2023 were the most difficult they had seen in a long, long time. 

The Q1 2023 Global Insights report released by broker giant Aon earlier this year (9 May 2023) noted that this renewal cycle was “the most delayed, complex and difficult in decades” and introduced ”significant volatility into the market, especially for natural catastrophe exposed property risks and specialty risks impacted by war and inflation”. 

By now, the extreme difficulty of this renewal period is old news, with the insurance sector having turned its head towards mid-year renewals and those upcoming in 2024, which fall alongside the potential for another round of significant costs that must be absorbed by insurers. 

The purchase of reinsurance is one of the largest costs that insurers will outlay in any given year, with various commentators across 2023 telling Insurance Times that significant increases in the cost of reinsurance were easily one of the largest issues facing the insurance sector. 

Speaking back in June, specialist insurer Peach Pi’s chief executive, Russell White, noted: ”One of the biggest trends in the insurance sector at the moment is inflation and inflation in reinsurance costs, which has a massive impact for a business like ours.

“We know that we will be paying double digit increases on our property reinsurance, which, of course, we ultimately have to pass on to customers in the form of premium.” 

And far from impacting only smaller specialist insurers, difficulties in reinsurance buying have impacted the entire insurance sector.

During a conversation following the release of insurer giant Aviva’s H1 2023 financial results, Adam Winslow, the firm’s chief executive for general insurance in the UK and Ireland, explained: ”There are other underlying reasons outside of inflation that mean pricing in certain lines and classes has hardened further and may still remain hard for a period of time, because all of the value chain isn’t within our control. 

”The reinsurance market hardened a lot and capacity came out of it, particularly for property catastrophe as a result of all the cat events in 2022.”

This has been a market-wide experience, with the shared hope being that the next round of renewals may offer some light at the end of the tunnel. 

A seismic shift

Evidence of the character of 1 January 2024 renewals is perhaps best gleaned from how various mid-year reinsurance buying cycles have gone.  

Ulf Lange, chief financial officer at Allianz Holdings, explained: “The reinsurance market is cyclical and recently we are seeing a very hard market. The current inflationary environment and lack of new capital entering the market, together with longer term trends such as climate change are contributing to this.” 

When asked whether he expected these tough conditions to persist for upcoming cycles, Lange said: ”The driving forces at play have not changed, for example climate change, inflation and capacity. Still, in our experience, the claims experience for reinsurers in the UK market has been solid so far.” 

While the macroeconomic factors that impacted January 1 renewals remain, as Lange noted, the exceptional character of these pressures has eased. 

In its statement on its H1 2023 financial results, international insurer Hiscox said that while the ”exceptional conditions seen at January 2023’s renewals had eased, the momentum in the market remains strong”.

Hiscox added: ”The January [2023] renewals saw a seismic shift in pricing following Hurricane Ian, with the market conditions akin to those following Hurricane Andrew in 1992.

”The June [2023] renewals also saw significant rate increases in US catastrophe and retrocession and we have again grown exposure, although less so than in January.” 

Speaking anonymously, another reinsurance buyer with responsibility for a multi-billion dollar reinsurance programme for a major international insurance carrier explained: ”1 January 2023 was a crazy renewal that caught most people by surprise – capacity was difficult to find.

“Hurricane Ian happened [in September 2022] and the whole market shut down. We – the buyers – had to make a market. That meant that we had to go to the reinsurers, listen to them and understand their concerns.

“Some French firms went out early, ignored what the reinsurers said and didn’t get capacity. They had to go back a second time, which was really a bellwether for the rest of us.” 

Despite the difficult character of 1 January 2023 renewals, this insurance buyer said: “Everyone is expecting 1 January this time around to be calmer – reinsurance underwriters were in many cases surprised themselves at how far cedants had been pushed by the hard market. 

“The catastrophe market has been relatively benign in 2023, while we saw the impact of inflation on pricing levels at the 1 July [2023] renewals.”

Underwriting discipline 

Of course, the real work of beginning the 1 January 2024 renewals cycle will begin, as it does every year, in Monte Carlo with the Rendez-Vous de Septembre conference. 

To be held between 9 and 13 September, the conference represents a vital point of contact between reinsurance buyers and reinsurers themselves, with the opportunity for insurers to communicate face-to-face with their partners. 

Lange noted that the event “helps to set the tone for the renewal cycle and is an opportunity to build and grow relationships”. 

But much work has always been completed prior to the conference, with many reinsurers looking likely to maintain a focus on underwriting discipline that they have shown of late. 

In a report on the financial prospects of the top 20 global reinsurers published this month (17 August 2023), S&P Global Ratings explained: ”We expect the long-term focus on underwriting discipline will remain key for reinsurers, with potential better investment income unlikely to divert their attention away from demonstrating their sound underwriting focus.” 

This focus on disciplined underwriting presents a degree of optimism for many insurers that have shown their own discipline. 

Speaking to Insurance Times, Markerstudy’s head of reinsurance Sue Skinner explained: ”Going into 2024 there is a big opportunity for reinsurers in the UK, particularly looking at the motor market. 

“We’ve had extraordinarily high rate increases going through on the original insurance premiums – what reinsurers are concerned with, if we’re looking at motor excess of loss specifically, are large claims costs, but the original insurance premiums are going to be going up a lot more than [the reinsurers’] costs.

“So looking forward, I’m hoping that reinsurers actually see 2024 as an opportunity for the UK to stabilise their pricing and, we hope, maybe even reduce their pricing, because they are benefitting from that UK market original rate increase.” 

However, as Skinner noted, it is slightly too early to be making predictions around what 1 January 2024 may bring in terms of renewals. What she says insurers can be doing at the moment is working with their reinsurance partners.

She explained: “Engagement is really, really important – we’ve had some catch-up meetings with our reinsurance partners over the year to explain what we’ve been doing with our pricing. The earlier that reinsurers can give a firm view of their pricing the better, as insurers have to build these costs into our rates. 

“That does depend on us as insurers too – we need to provide the reinsurance market with concrete data to enable them to assess pricing, do that in good time and be transparent when providing that information.”