Reinsurance renewals one of the hardest in living memory, says Howden

The convergence of geopolitical and macroeconomic shocks, as well as the second-most expensive natural disaster ever in the form of Hurricane Ian, has led to the hardest property-catastrophe reinsurance market in a generation, according to analysis from broker Howden. Primary commercial rate increases are moderating but remain difficult in challenged lines and sectors. Corporate risk managers must therefore brace for another tough year ahead as reinsurers place continued pressure on the primary carriers. Howden said that “multi-decadal” high reinsurance risk-adjusted rate increases were recorded at 1 January 2023. Retrocession business was up 50%, direct and facultative up 45%, global property catastrophe up 37% and London market casualty up 5%. “Divergent rate momentum by class of business had been the recent norm as individual mini-cycles responded with varying levels of sensitivity to losses and broader macroeconomic factors. Pricing cycles in the commercial insurance and reinsurance sectors are now converging, marked by price increase moderation overall for the former, albeit with strengthening in challenged areas, and rapid acceleration (dislocation even) for the latter,” concluded Howden. It said that mounting pressures in the reinsurance market, already evident during last year’s mid-year renewal cycle, were significantly exacerbated by Hurricane Ian, reinforcing one of the hardest reinsurance markets in living memory. “Demand-side pressures coincided with a severe capacity crunch, as capital providers pulled back while others were only willing to maintain allocations,” said the broker. This was, in turn, driven by a significant impairment of dedicated reinsurance capital, which fell sharply as investment grade securities experienced their worst performance in over 40 years, it added. “Historically, the sector gearing to high grade, short-to-medium duration securities has bolstered its capital position in an era of ultra-loose monetary policy. Reinsurers must now navigate an environment of rising inflation expectations and higher interest rates, which has driven assets lower on a mark-to-market basis,” commented Howden. The broker estimates reinsurance capital erosion of 15.7% to $355bn by the end of 2022, the first full-year decline since 2008. Combined with significantly higher premiums, this sent the sector’s solvency margin ratio to below 100, a level last recorded during the global financial crisis. It also left certain reinsurers more exposed to liquidity and credit risks at a time of heightened claims uncertainty, noted Howden. “The reinsurance sector has reached concurrent secular and cyclical tipping points,” said David Flandro, head of analytics at the broker. “It is experiencing sustained, heightened loss activity and war risk just as the global economy exits the ‘great moderation’ of interest rates and asset price volatility. Pursuant increases in carrier costs of capital are underpinning higher rates-on-line, lower capacity levels, and straitened terms and conditions,” he added. “The last time we saw this level of capital dislocation was during the 2008-2009 global financial crisis. At the same time, the sector is experiencing its most acute, cyclical price increases since the 2001-2006 period, if not before,” said Flandro.

Reinsurance renewals one of the hardest in living memory, says Howden

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