Reinsurance rate increases to continue at 1 Jan but signs of moderation

Reinsurance prices are likely to increase further at the 1 January renewals but there are signs that price rises may be moderating. Longer term, the jury is out on whether the hardening market is sustainable. Concerns over climate change and cyber losses could mean higher reinsurance costs going forward, although a period of benign catastrophes and excess capacity might result in increased competition, experts argue. As the market gears up for the all-important January reinsurance renewal, which kicks off in September, reinsurers are pushing for further rate increases. A run of above-average natural catastrophe years, topped off by Covid-19 losses in 2020, have seen them struggle with profitability. In the four-year period since 2017, a group of leading global reinsurers tracked by Aon reported an average combined ratio of 102.5% and a return on equity of 4.8%. “This is not enough to meet the expectations of investors and ratings agencies, and reinsurers that have underperformed are now under significant pressure to improve results,” said Mike Van Slooten, head of business intelligence for Aon’s Reinsurance Solutions division in London. It has been a “testing period” for the reinsurance industry, according to Mr Van Slooten. The sector has experienced a run of major natural catastrophe losses, including hurricanes in the US and typhoons in Japan, as well as an accumulation of more localised losses from wildfires, tornadoes, floods and hailstorms. “Losses from secondary perils are difficult to model and are happening more frequently, and pricing is still adjusting in response,” Mr Van Slooten said. In addition to an increase in natural catastrophes, reinsurers have had to contend with low interest rates and, more recently, less favourable runoff of prior-year reserves. Underwriting discipline has generally increased in response to these developments, said Mr Van Slooten. At the same time, retrocession costs have increased, which has affected the underwriting appetite of some reinsurers. Ratings agency Moody’s expects reinsurance price firming to continue through 2021 and into 2022. This is driven by a number of factors, including some reinsurers moderating their risk appetites in light of market volatility seen last year, low investment returns and reduced capacity from alternative capital markets, explained Brandan Holmes, vice-president and senior credit officer at Moody’s Investors Service. There is also uncertainty around claims and risk, both on the nat cat side and with respect to loss-cost trends on casualty business and cyber, said Mr Holmes. “Rising uncertainty around the effects of climate change, which feed into more potential volatility in nat cat losses, are also contributing to reinsurers seeking higher prices,” he added. Mr Holmes expects reinsurance prices to follow the evolution of the commercial P&C market, which has seen rates rising strongly but with price increases recently starting to flatten out. “If reinsurance price increases continue to outpace loss-cost trends and absent significant unexpected nat cat activity, we could see prices stabilising in 12 to 18 months’ time,” he said. The January 2021 renewal is still too early to call, according to David Flandro, head of analytics at HX, part of Howden Group. Catastrophe losses continue to be the main catalyst for reinsurance pricing, but there are a number of variables that could also influence the outcome of renewals, he said. These include interest rates, potentially higher inflation and changes in the macroeconomic environment as the world emerges from the pandemic, he added. “We are in an environment where anything can happen. We are only at the start of the Atlantic hurricane season, and large catastrophe losses in the second half of 2021 would likely see further increases in property catastrophe rates in January. However, if we have a relatively benign cat loss year like 2015 or 2016, it’s hard to foresee anything more than a moderation in rate increases,” said Mr Flandro. Mid-year renewals this year have shown a trend for moderating prices, according to Mr Flandro. Numbers from Howden’s data division HX show that Florida reinsurance rates increased 7% at the June 2021 renewal, compared with 26% at the same time in 2020. While US property catastrophe rates have increased rapidly in the past two years, global reinsurance pricing has seen only small rises. January renewals, in which the majority of large European treaty reinsurance renewals take place, have not experienced the rapid increases seen in US property catastrophe, explained Mr Flandro. Global reinsurance rates also have a long way to go if they are to make up for reductions in the decade-long soft market, according to HX data. There are factors that could lead to softening but these are not present in the market right now, according to Mr Holmes. These factors could include an increase in available capacity, including more alternative capital entering the market, rising interest rates and a change in assessment of the overall risk environment, he said. Carlos Wong-Fupuy, senior director for Global Reinsurance Ratings at AM Best, agreed that it is difficult to predict the exact shape of January 2022 renewals but thinks hardening will continue. “We see the rate hardening market continuing for at least a couple of years. New capital is not having a material impact yet. It has been limited, with $10bn added last year to a market with $500bn in existing capacity,” he said. Past reinsurance market hardening has been driven by shrinking capacity following a large catastrophe, such as Hurricane Katrina or the 2001 World Trade Center terrorist attacks. Recent market hardening, however, has been driven by the need to improve earnings, rather than capacity shortages, and this makes it hard to predict how the market will play out, according to Mr Van Slooten. “Rates have certainly increased on loss-affected business, but probably not to the extent that reinsurers think they should. Capital has come into the market and limited the opportunity,” he said. Reinsurance industry capital levels are proving robust. Aon’s estimate of global reinsurer capital increased from $625bn at the end of 2019 to a new peak of $650bn at the end of last year, despite the impact of Covid-19. This included about $15bn of new equity, mainly raised by established companies. About $3bn was contributed by three new startups: Vantage, Conduit Re and Indigo. So far, startups have been disciplined, according to Mr Wong-Fupuy. “Companies are not just deploying capital naively; they are being very selective on how that capital is allocated. Most of these new company formations have very seasoned management teams, which are being extremely careful on how they deploy their capital,” he said. “The question has always been: is the new capital going to start repeating the cycle? In terms of excess capital and pressure on rate softening, we don’t think that’s the case. There is a change compared with previous high catastrophe cycles,” he added. A number of factors could support sustained reinsurance underwriting discipline, including low interest rates and uncertainty around exposures, explained Mr Van Slooten. Reinsurers and capital market investors are conscious of the implications of climate change, while the pandemic and rise in cyberattacks have highlighted the potential for unexpected and systemic losses, he said. In addition, there is growing uncertainty around casualty lines, including the impact of social inflation and the potential for Covid-19-related liability. Insurers will also be wary of a potential spike in inflation as the global economy recovers from the pandemic, which could also hit reserves, according to Mr Van Slooten. He said underwriting discipline is likely to hold at least until recent rate increases work their way into reported earnings. While underlying underwriting performance has improved, it has been masked by Covid-19 and natural catastrophes in 2020 and early 2021, Mr Van Slooten added. “Pricing has to earn its way through to the bottom line. The benefits are only now beginning to emerge in reported results, but if the rest of 2021 is relatively benign in terms of natural catastrophes, the improvement should be tangible at the year-end,” he said. The reinsurance market underwent significant softening between 2012 and 2017, driven by an absence of major catastrophe losses and an influx of alternative capital, explained Mr Van Slooten. While rates have since increased, not all ground lost during this period has been recovered, he said. Reinsurers argue that reinsurance prices need to adjust for rising exposures and volatility, namely climate change-related increases in natural catastrophes and systemic events like Covid-19 and cyberattacks. According to Moody’s, the coronavirus pandemic has increased insurers’ awareness of risk and made them more cautious about other longstanding insurance perils, including cyberattacks, climate change and social inflation. “We do not think that reinsurers are fully compensated for rising risks around climate, cyber, pandemic, and that prices would need to rise to improve risk-adjusted returns. That said, there are limits on reinsurers’ pricing power and it is not clear whether insurers and their customers will be willing to pay a truly economic cost,” said Mr Holmes. It is difficult to say to what extent rising prices for reinsurance will lead to rising prices for primary insurance, and to what extent customers will be willing to pay higher costs, said Mr Holmes. “Generally though, if there is more risk in the system, we would expect prices to rise for both reinsurance and primary insurance,” he said.

Reinsurance rate increases to continue at 1 Jan but signs of moderation

Want to read this article?

Read Next

Munich Re reorganises P&C underwriting in Asia Pacific, Middle East & Africa

Claims likely to increase as vessels remain stranded in Baltimore

Climate change to cause ‘massive economic damage’

Two-paced upstream energy market falls in favour of buyers

Energy insurer Paratus launches brokerage division

Munich Re reorganises P&C underwriting in Asia Pacific, Middle East & Africa

Claims likely to increase as vessels remain stranded in Baltimore

Climate change to cause ‘massive economic damage’

Two-paced upstream energy market falls in favour of buyers

Energy insurer Paratus launches brokerage division

Want to read this article?

Read Next

Munich Re reorganises P&C underwriting in Asia Pacific, Middle East & Africa

Claims likely to increase as vessels remain stranded in Baltimore

Climate change to cause ‘massive economic damage’

Two-paced upstream energy market falls in favour of buyers

Energy insurer Paratus launches brokerage division

Related Articles