Major change in insurers’ underwriting approach as reinsurance market hardens

There has been a major change in insurers’ underwriting approach in 2023 compared to last year, as a result of the hardening reinsurance market, according to Lockton. The broker says reinsurers have increased rates, tightened terms and conditions, and reduced underwriting capacity following January renewals, with knock-on consequences for primary insurance buyers.

In its Insurance Market Update H1 2023, Lockton says this is likely to directly affect insurance buyers even if they are not exposed to nat cat risks, as insurers try to recoup losses and/or higher expenses across the market. However, it adds that insurance buyers with strong risk management practices may be able to negotiate better terms with insurers by diversifying and adjusting their programmes, and finding alternative risk solutions that better suit their needs.

The update says that reductions to reinsurance capacity and the recent sharp rise in interest rates are creating hardening market conditions, despite easing inflation.

Lockton says the volatile economic and geopolitical situation continues to create uncertainty across multiple insurance lines, prompting reinsurers and insurers to re-evaluate the cover offered by their products. “Risk-adjusted rate movements are becoming a growing feature of the market. Buyers with strong risk management practices may be able to diversify and adjust their programmes, or identify alternative risk solutions, with early broker engagement likely to deliver rewards. Where possible, buyers may need to consider retaining risk to limit premium increases,” it adds.

The broker notes that insurers have been reporting healthy returns on the corrective rating measures taken in previous quarters, leading to a slow decline in the level of rate uplifts they are seeking. But it says this has now been overshadowed by the recent tough reinsurance negotiations.

On the property side, Lockton says challenging reinsurance renewals at 1/1 following years of large catastrophe losses and high inflation are the main drivers shaping the direct property insurance underwriting approach in North America. It sees a challenging market outlook for property insurance buyers, particularly with heavy cat exposure. “Insurers will be showing increased focus when underwriting property portfolios with a footprint in high cat risk areas, with particular focus on ‘Tier 1 NWS’ and ‘high hazard earthquake’ exposure,” says Lockton.

For UK property, it says the competitive environment benefiting insurance buyers in 2022 is facing pressure from a generally tightening property reinsurance market, and many market participants predict a much more challenging period in 2023.

For UK casualty, Lockton notes a period of continued, yet slowly declining, rate increases across the market. “While this is a clear change from a consecutive period of more aggressive rate corrections, the impact of economic and social inflation, and the spotlight on heavy US litigation, is forcing markets to continue pushing for ‘appropriate’ rates. However, the entrance of new capacity to the market is driving competition and pushing increases down from last quarter, helping to mitigate steep rate uplifts,” it says.

Insurer scrutiny continues for cyber, it adds, and underwriters remain focused on cyber security controls that businesses have in place to reduce exposure. However, Lockton notes competition among insurers and the rising underwriting appetite in this space is creating new options for insurance buyers, and the market is showing signs of stabilisation.

The environment for D&O liability insurance buyers improved throughout 2022, and this trend is expected to continue into 2023, Lockton says. This is despite concerns around a global recession, increased financial uncertainty and the war in Ukraine. “The D&O market has stabilised, and although the underlying claims exposures have not changed, we have seen a return to a competitive D&O insurance market. This softening of D&O market conditions has happened much more quickly than most commentators envisaged,” says Lockton.