Reinsurance tightening to hit local primary industrial fire markets

The recent January reinsurance renewal saw treaty reinsurers take a tougher stance on large industrial fire accounts that will likely filter through to primary buyers, reinsurance broker Gallagher Re International told Commercial Risk.

The broker also said reinsurers are maintaining pressure on nat cat and focusing on US-exposed casualty risks.

Compared with the turbulent January reinsurance renewal in 2023, this year saw a welcome return of stability. Terms and conditions for property casualty reinsurance were generally unchanged, while rates for loss-free accounts were modest – up to 10% in Europe, according to Gallagher Re. Loss-impacted programmes in Europe, however, saw rate increases of 20% to 40%, or even higher for earthquake risk in Turkey.

Significantly for large corporates, reinsurers took a more cautious approach to property per-risk reinsurance, which helps protect insurers against single large losses, such as an industrial fire and explosion. With increased values and complexity of large risks, and with higher replacement, rebuilding and business interruption costs, the market has experienced an uptick in mid-sized to large claims, according to James Vickers, chairman of Gallagher Re International in London.

“For property single-risk covers, it does not matter where you are in the world, it has not performed well, and [treaty] reinsurers are reluctant to write that business. No new capacity came in [at 1/1], and there has been huge emphasis on the remedial action taking place at an underwriting level, such as line size, rating levels, deductibles, and insurers’ approach to risk management,” said Vickers.

Ongoing global and European per-risk losses affected the supply of reinsurance capacity at 1/1, particularly for underperforming lower layers, according to Gallagher. Profitable programmes saw modest risk-adjusted increases, while loss-making programmes required “substantial restructuring” to attract capacity and complete placements, the broker said.

A tighter per-risk reinsurance market will have implications for the property insurance market, according to Vickers. “Reinsurers in many markets are no longer playing that game, and are reducing limits or eliminating coinsurance. Insurers can still write a net line, but in some markets single-risk business has been forced out [of the local treaty reinsurance market] into the international direct and facultative markets,” he said.

So insurers will find it harder to write a large risk 100%, and then co-insure, explained Vickers. “Individual insurance companies may put out smaller lines, so in that regard there could be less capacity. Local brokers may be able to find capacity to fill that out, but if not, insurers will have to look to facultative reinsurance in the global market. So, we could see more constraint on local capacity and a tightening of underwriting conditions and price. And if you have a risk that can’t be completed in the local market, you will have to pay the global market standard to get it done,” he said.

While the January 2024 renewal looks to have provided more stability and predictability in the reinsurance market, reinsurers remain steadfast in their focus on disciplined underwriting. Last year’s price increases and moves to higher attachment points, coupled with ample retro capacity and a buoyant cat bond market, eased pressure on property catastrophe reinsurance, in particular at the top end of programmes. In the US, risk-adjusted rate decreases were obtained for loss-free programmes in some regions for high programme layers.

According to Vickers, corporate insurance buyers may now find it easier to purchase high levels of nat cat cover, but at a price.

“Larger limits may be more easily obtained. The question is at what deductible level and price. Last year it was difficult to get any additional cat limit, no matter what you were prepared to pay. It’s probably more available now, but there will be strict underwriting conditions around that,” he said.

Last year, reinsurers pushed for tighter coverage terms and conditions in areas like natural perils and strikes, riots and civil commotion (SRCC). While the pressure over terms and conditions has eased, the days of SRCC cover being included in property policies for no extra charge appear to be over.

“Reinsurers are concerned about SRCC and the restrictions in terms of event definitions for SRCC have not eased very much, and that provides some level of constraint for insurers,” said Vickers. The focus from insurers on underwriting SRCC separately from property cover is likely to continue, he added.

The casualty reinsurance market has also tightened, especially for US exposures. In the run-up to the renewal, some reinsurers voiced concerns over claims inflation, while several increased reserves for casualty business written between 2013 and 2019. Confidence in the casualty market among some reinsurers has diminished despite underlying rate increases and limit reductions since 2019, according to Gallagher.

“If there is any US exposure, even a small amount of incidental US exposure, reinsurers want to know if it is written at the same terms and conditions as if it were written in the US. Very often the answer is it is not, because US casualty underwriting has tightened so much,” said Vickers.

Pure US-exposed casualty business is nuanced, with differing appetites among reinsurers amid concerns about social inflation and loss trends, according to Vickers.

“Some reinsurers are looking at how companies have re-underwritten portfolios, reduced limit and increased rates, and are confident that the business is adequately priced for the risk, and taking into account social inflation and nuclear awards. Other reinsurers say it’s not enough,” said Vickers.

“The reality is the [casualty] market did not tighten much at 1/1, as other reinsurers were prepared to step in. At the end of the day, casualty renewals were not as extreme as some predicted and were comfortably completed. But the underlying issues have not gone away in terms of inflation and nuclear awards, and the prospect of lower interest rates,” he said.