Reinsurance renewals bring little comfort to insurance buyers

As the dust settles on the latest reinsurance renewal season, what does it all mean for multinationals and risk managers? Will it prolong the hard market, or at least stop dead in the tracks any moves to a softer market? Or will its effects only be seen in certain areas, such as property nat cat? Global Risk Manager talked to two leading brokers about the impact on insurance buyers.

The January reinsurance renewals have been described by brokers and primary insurers as frustrating, gruelling and very late, with words such as ‘tense’, ‘seismic change’, and ‘dislocation’ being bandied about. These are not encouraging words for a primary market that has recently seen some small signs of the slowing of a hard market that has been around for some years.

Does the difficult reinsurance renewal faced by the primary market mean that the moderation being talked about in pricing will be nipped in the bud?

“The effect of the renewal is that primary insurers are carrying more risk”, said James Vickers, chairman, international, Gallagher Re, “as they have increased their retentions on their property catastrophe and per-risk reinsurance programmes, which are also now more expensive.”

He said these changes will impact both the volatility of their own results and the cost of the capacity that they deploy. “What this means for multinationals and risk managers is that insurers will be seeking to achieve risk-adjusted rate increases above the underlying rates of inflation and will look to their policyholders to increase their deductibles. The cost of capacity for large limits will increase even if the layers are loss free. and particular attention will be paid to coverage,” he explained.

At the same time, non-damage business interruption and so-called secondary perils (i.e. flood, wildfire, snowstorm, and severe convective storms, as well as strikes, riots and civil commotion) will be under scrutiny, said Vickers.

Terence Williams, Aon’s chief broking officer EMEA, said the renewal process was strained, with quoting delays, tightening of capacity and rate increases, especially for nat cat-exposed risks.

“The impact will be felt across the entire property market. Nat cat-exposed risks and those programmes with significant losses will be most affected, but reinsurance pricing increases are driven by a multitude of factors, including underwhelming returns, above-average cat losses, inflation, FX movements and climate change, to name but a few. We should also not focus only on the pricing increases, but also on the impact of coverage restrictions, and how these are going to impact clients,” he said.

Vickers said he believes price increases, even for loss-free property accounts, will filter down to the primary markets in all territories, but to differing degrees, with US natural catastrophe risk seeing the greatest pricing-increase pressure followed by Europe and then Latin America and Asia.

He added: “Aside from natural catastrophe risks, what buyers in all territories have to recognise is that the ‘pure fire’ results for commercial and industrial risks have been universally poor for primary insurers with no regional/territorial variation. Primary insurers will be looking to address this through their standard fire rates and deductibles.”

While capacity was constrained on the property side, on balance most needs were met, albeit at higher prices, especially for nat cat. But what about other areas of the market? Were other lines hit by higher pricing at the January reinsurance renewals?

The answer is yes, but perhaps not to the same degree as in property. Political violence and SRCC (strike, riot & civil commotion) is the other area most challenged by a restriction in market and underwriting appetite, according to Williams.

Vickers agreed, noting “concerns about inflation and recessionary pressures leading to social unrest also resulted in a restriction in the reinsurance coverage for strikes, riots and civil commotion, with much tighter spatial and time limits being applied.”

He said political violence and terrorism (PVT) and political risk saw substantial limitations in the amount of cover that reinsurers are now prepared to accept and a tightening of the loss definitions. Coverage for any risk with touch points in Russia, Ukraine and Belarus is particularly difficult.

Trade credit was reasonably stable though there are underlying concerns over the recession outlook and the capacity for peak buyers, which is reaching market capacity, he said. As for cyber, there was some slightly better news: “Cyber renewals, while not without their challenges, were easier than expected, with some additional reinsurance capacity being secured that will help primary companies manage the growth in their underlying portfolios.”

On the casualty side, it was also better news, or at least better than property cat business. Williams said: “Broadly, demand and pricing remained relatively stable, but in some casualty areas pricing for reinsurance was more favourable as reinsurers sought opportunities to diversify away from property cat.”

But he warned: “Despite this more positive trend compared to property cat business, we need to continue to ensure that clients consider the impact of social inflation, claims cost escalations, US auto loss history, and historically large limits, as these are examples of areas being reviewed by insurers. Clients should consider these factors as they plan for casualty renewals.”

The main issue is that reinsurers are concerned over the impact of both social and underlying inflation. “In most cases primary insurers are adjusting their prices to take inflation into account, which reinsurers are broadly supporting, but when reinsurers are providing cover on an excess of loss basis their pricing is increasing over the rate of underlying inflation to cater for social inflation, which is more severe at higher levels,” said Vickers.

He noted that the pricing changes vary a lot by country and class, but the net impact is that primary companies are finding their casualty reinsurance costs are increasing and in many cases they have increased their own retentions to help manage the cost increase.

“The net effect of this is that, like property, casualty insurers are retaining more risk and therefore volatility, though some of this is offset by higher interest rates and the increased investment income they can achieve as well as the higher discount rate they can apply to their long tail reserves,” he added.