Commercial and specialty reinsurance market continues to harden

The cost of commercial and speciality reinsurance is set to rise further at the January 2020 renewals, with a tightening of capacity in loss-affected lines like directors and officers (D&O), reinsurance brokers have told Commercial Risk Europe. The reinsurance market has gradually hardened in recent years, but has not yet witnessed the sharp increases seen in primary commercial and specialty lines during 2020. However, that looks set to change as reinsurers seek to address underperformance and increased volatility. Primary insurance and retro rates have risen much faster than excess-of-loss reinsurance, but the commercial P&C and specialty reinsurance market is now playing catchup, according to Michael Van Slooten, head of business intelligence at Aon Reinsurance Solutions. “I would not expect anything too drastic, but there is a broadening of upwards pressure and we will not see a let-up anytime soon. This is likely to play for a while longer,” he said. “The reinsurance sector remains well capitalised despite a run of losses, which has helped keep a lid on rates. But we are at a point where tolerance of poor earnings has gone and management teams are under pressure to increase earnings. Increasing today’s pricing is really the only lever left to reinsurers,” he said. While there remains adequate capacity for most risks, it is “tightening” for certain loss-affected lines such as financial, retro and US auto, according to Ross Howard, global executive chairman of Lockton Re. Risks that have experienced major losses are “truly hard”, while the rest of the market is “stable”, he told Commercial Risk Europe. The hardening is expected to accelerate in 2021 reinsurance renewals, explained Mr Howard. However, in the run-up to the January 2020 renewal, the market remains well capitalised, he said. “So far, the industry has not overreacted to the current climate and there are lots of lines where market changes are controllable and rates are reflective of the business. There is only a really hard market for loss-affected lines of business, where capacity is in short supply and programmes have been restructured,” said Mr Howard. For example, reinsurance capacity for D&O insurance is “seriously tightening” as a number of players have withdrawn from the market, making it harder to place programmes, he said. Reinsurers are also growing more cautious over cyber exposures, in part due to a rise in ransomware claims and concern about systemic risks, exacerbated by the pandemic, he added. Mr Van Slooten explained that market hardening is not a consequence of falling capacity, as with past cycles. In fact, reinsurance market capital has proved resilient despite the pandemic, and some new capital has flowed into the market. According to Aon, global reinsurer capital was broadly flat during the nine months to 30 September 2020. Instead, changes in the reinsurance market are being driven by the need to address poor results, according to Mr Van Slooten. Reinsurers’ earnings have fallen due to a combination of factors. These include catastrophe losses, social inflation, low interest rates and the effects of almost a decade of market softening, which eroded premium rates by as much as one third in some lines. “Interest rates have been the constant pressure since 2008, a pressure that has now been exacerbated by Covid-19. Cuts in interest rates pressure earnings and add to the issues on the underwriting side – major catastrophe losses, social inflation and uncertainty around Covid-19 reserves,” said Mr Van Slooten. “Added all together, this has resulted in poor earnings for reinsurers and growing external pressure from investors and ratings agencies to improve results. Capacity is still there for the large corporate P&C and speciality sectors, but reinsurers are more discerning about how they will deploy it, with more concern for volatility,” he added. Compared with past market cycles, reinsurers have a better understanding of risk, according to Mr Howard. “With past cycles, reinsurance capacity was hard to come by in almost all lines of business. But that is not the case now. In most cases there will be reinsurance capacity, but reinsurers are able to pick and choose where they want to play,” he said. So far, there has been capacity for brokers to get deals done, but the next few weeks will be telling, according to Mr Howard. “Reinsurers have set budgets for this renewal season and once they reach that budget they are unlikely to want to increase exposure in certain classes. As we get deeper into the renewal season, things will not get easier for most lines,” he said. Faced with higher reinsurance costs, insurers will have a number of options. These include passing on the additional costs, absorbing increases, or restructuring their reinsurance programmes or primary insurance offerings. “Low reinsurance pricing has favoured insurers in the past but this may not be the case going forward. Increased reinsurance pricing will, at the very least, help sustain pricing on the primary side,” Mr Van Slooten said. “Reinsurance buyers will have to pay more for their cover but I would argue that they are receiving enough at the front end to cope. There does need to be a catchup as reinsurers’ earnings are well below expectations,” he continued. Demand for reinsurance is growing among commercial P&C and speciality insurers, largely in response to an increase in major losses, explained Mr Van Slooten. “Covid-19 was an unexpected loss and many companies have re-evaluated their risk appetite and are looking to protect their balance sheets and manage volatility,” he said. In the past, alternative capital has helped keep reinsurance costs lower, but this source of capacity appears to have stalled. Alternative capital rose rapidly from $10bn in 2005 to about $90bn in 2017, resulting in cheaper retro and property catastrophe reinsurance cover. However, the recent run of natural catastrophe events has caused losses and trapped collateral. This means the actual capacity that can be deployed in today’s market is some way below the headline figure. According to Aon, alternative capital declined by 4% to $93bn in the first half of 2020. Meanwhile, concerns around the impact of climate change have resulted in a ‘flight to quality’ and caused some investors to leave the market.

Commercial and specialty reinsurance market continues to harden

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