Corporate buyers face shortage of cat cover and rate hikes

Corporate insurance buyers face a shortage of catastrophe cover in 2023 after the hard reinsurance market dashed hopes of a return to stable primary conditions at the January renewal, Hugo Wegbrans, global head of broking at WTW, told Commercial Risk.

He explained that the consequences of the hard year-end catastrophe reinsurance market have already be been felt by corporate insurance buyers at 1 January through rate increases and higher retentions. “The question now is how much [of the increased cost of reinsurance] will insurers put in front of clients, or retain themselves,” he said.

The hardening reinsurance market in the closing months of 2022 caused disruption and delays to January renewals for large corporates, as insurers waited to firm up reinsurance arrangements before finalising terms. The result was a “frustrating” renewal for many risk managers, according to Wegbrans.

“It was like the old hard market in the direct space, where deals were done in the last week of renewals. People just did not know what the reinsurance pricing was at the back-end of the year. That uncertainty basically got in the way [of renewals], causing delays and last-minute changes,” he said.

“Insurance and risk managers can cope with changes in market conditions but late and uncertain renewals are frustrating. And that was the case for a number of our clients. Some insurers helped where they could – by providing capacity and terms without the clarity of reinsurance – but they needed to anticipate less cat capacity and increased pricing,” he added.

Following the 1 January reinsurance renewal, many commercial insurers are now paying more for less property catastrophe reinsurance protection. Reinsurance rates in Europe and North America increased while deductibles and attachments points rose substantially. Reinsurers also moved to narrow coverage in a bid to reduce their exposure to costly frequency weather events. They also pulled back from non-natural catastrophe perils, such as war, riots and civil commotion.

Primary brokers and risk managers entered January insurance renewal negotiations in the final quarter of 2022 expecting a return to market stability, following years of P&C rate increases. However, changes in the reinsurance market “spoiled the party” and resulted in a tough insurance renewal for corporates, especially those buying property catastrophe lines, Wegbrans told Commercial Risk.

The pace of insurance rate increases slowed in most P&C lines during the second half of 2022, while directors and officers lines even saw reductions, according to Wegbrans. Overall increases were moderate, up in the single digits come 1 January, but prices for large complex accounts with catastrophe exposures experienced a shortage of capacity and a spike in rates, he explained. Some buyers faced increases of 30% to 40% for large catastrophe exposed property programmes, added the broker.

Insurers sought to pass on increased rates and higher retentions for property catastrophe risks imposed by reinsurers, explained Wegbrans. “The big property limits were tough to [place], while complex business interruption (BI) and supply chain risks were cut back quite heavily. Where there were accumulations of risk, or unknown and unmodelled risk, is where most of the programmes were cut back,” he said.

Market conditions could stabilise later this year if capital is attracted into the reinsurance space by the prospect of higher returns, explained Wegbrans.

“It depends on whether unused capital becomes available to the market in the first quarter at better terms than quoted end of 2022. But I would expect more clarity later this year, although property catastrophe limits will remain super difficult, and some property occupancies will also remain difficult, and carriers will continue to push on retentions and deductibles,” he predicted.

“Corporate insurance clients will have to decide whether they want to buy expensive cat capacity or not. Increased reinsurance pricing will be charged to those with cat risk. Property cat aside, the [corporate insurance] market is likely to be stable for 2023,” Wegbrans said.