The countdown has started and we are rapidly coming to that crucial time of year – we’re not talking the number of shopping days to Xmas, important though that obviously is. We’re talking about renewals. Of course, not everyone has January renewals but the insurance sector as a whole has a focus on January renewals, which tend to set the scene for the next 12 months.
Every year it goes like this. In September, at Monte Carlo (virtually or in-person in previous years), discussions between insurers and reinsurers begin (along with a lot of receptions, parties etc). Then in October, in Baden Baden, the real negotiations begin. And then the renewals come into force on 1 January.
So just where are we with this year’s renewal season? It’s set to be an interesting time and next year’s renewals appear to be far from certain. Because there seem to be two slightly differing views.
On the one hand, brokers and other observers that monitor the insurance markets have been suggesting that the hard market has reached its peak and price increases have been moderating. While they stress that prices are still increasing, the rate is slowing down in most lines. The market is more often now described as firm rather than hard.
But at the same time, reinsurers are warning that the upcoming renewals will be tough for buyers, with the hardening market continuing for some time, pointing to the increase in nat cat losses as a result of climate change and the growth in inflation.
Of course, all the players in the market have their own agendas when it comes to pricing and the underwriting cycle. Brokers, on behalf of their clients, are looking to see price increases moderate; and reinsurers are looking to talk up the market, especially during the renewal season.
So is it just reinsurer rhetoric?
September’s Monte Carlo Rendez-Vous and October’s Baden-Baden reinsurance meeting heard from several reinsurers that they expected further price rises when contracts are renewed in January, largely due to increasing natural catastrophe claims linked to climate change.
Munich Re said it still sees prolonged hardening for the European (re)insurance market at year-end renewals and beyond, as losses, higher inflation and low interest rates combine. The reinsurance giant pointed out that the European market has suffered some of the worst nat cat losses this year, mainly flooding. It also noted higher inflation and lower interest rates.
But it is not just the reinsurers. Aon noted in a report that the world’s largest reinsurers are heading for another loss this year, and while strong rate increases drove profitable first-half results, these gains will be wiped out by the European floods in July and Hurricane Ida, which could result in tougher renewals for reinsurance buyers.
Aon said 2021 is likely to follow the trend of previous years, where reinsurers “failed to cover the cost of capital” and recorded an average combined ratio of 102.3% between 2017 and 2020.
Ratings agencies are also warning of reinsurance price increases. Fitch Ratings said it expects double-digit percentage premium rate rises for property catastrophe cover in 2022, due to the excess losses in 2021 and the prospect of higher natural catastrophe claims frequency and severity in future. Its outlook for the global reinsurance sector is ‘improving’ to reflect Fitch’s” expectation that the sector’s financial performance will continue to improve in 2022, driven by rising prices in a hardening market environment and a higher economic activity.” Note ‘rising’ and ‘hardening’. No mention of ‘moderating’.
And S&P Global Ratings warned recently that reinsurers could be underestimating their exposure to natural catastrophes by as much as 50% because of climate change, due to an exposure gap that has been created by difficulties in modelling the impact of climate change on nat cat risk.
And the US National Oceanic and Atmospheric Administration (NOAA) said the US recorded 18 billion-dollar weather events in the first nine months of 2021, which it called “unprecedented”. The number of natural disasters in the US is at its highest for the first nine months of a year on record, the NOAA said, adding that 2021 is the seventh consecutive year with ten or more disasters costing more than $1bn.
There is still plenty of capacity, so the naturally competitive nature of reinsurers may yet see a moderation of pricing at the January renewals. The question is to what extent this will affect corporate insureds. That is the unknown, and many classes of business will be unaffected by what is happening in the property catastrophe market. Perhaps the only thing that is clear is that loss-affected lines are unlikely to see a moderation in pricing.
Let’s hope Santa delivers on the risk and insurance managers’ Xmas wishlist rather than the reinsurers’.