Reinsurers applying brake to insurance market softening

The return of more stable reinsurance market conditions is easing pressure on the commercial insurance space. But with no softening in sight, the calming market may offer limited relief for corporate insurance buyers, experts told Commercial Risk.

Following a turbulent reinsurance renewal at 1 January 2023, this year’s renewal provided a welcome return to more stability and predictability, according to reports from major reinsurance brokers.

Renewals developed in a much more orderly fashion than last year, and without any surprises in terms of capacity, according to Carlos Wong-Fupuy, senior director at AM Best.

“Supply for property cat increased compared to the previous year, although it remained focused on the higher layers, with terms and conditions unlikely to soften any time soon. Rate adjustments have been much more moderate, reflecting cost inflation and portfolio-specific loss experience. Capacity on high frequency layers remains restricted and heavily dependent on the ability of primary carriers to improve the risk quality of their portfolios,” he said.

With ample capacity for most classes, reinsurance rates increased by single digits at the turn of the year. Reinsurance broker Guy Carpenter’s global property catastrophe reinsurance rate-on-line index rose by an estimated 5.4% year on year in January. The US index increased by 5.25% in 2024, compared with 31.3% at the January 2023 renewals.

With the exception of loss-affected countries like France, Italy, Turkey and the US Midwest, property cat pricing movement was “modest” on a risk-adjusted basis at 1/1, as reinsurers confidence around pricing improved, according to James Vickers, chairman of reinsurance broker Gallagher Re International in London.

“Generally speaking, the property cat market has calmed down, there is significant capacity and primary companies were able to buy more vertical cover. The problem for primary companies, however, is managing their retentions, as the aggregate and low-level occurrence covers that they were able to buy to manage volatility – and for some to help manage capital – are not available,” he said.

Fundamental changes in property cat reinsurance structures enacted at 1 January 2023 – namely, significant increases in deductible levels and attachment points – insulated reinsurers from the worst of the nat cat losses last year. According to Swiss Re, record-breaking thunderstorms produced insured losses above $100bn in 2023, the fourth year in which losses exceeded this threshold. But despite nat cat losses, the property and casualty reinsurance net combined ratio for the first nine months of 2023 improved to 89% from 100.4% in the prior year period, according to analysis by Aon.

Reinsurers are looking to insulate themselves from attritional losses like floods and hailstorms, which puts pressure on primary companies to do something about these risks, according to Vickers. “The easing of the rate increases in the property cat market is helpful for commercial insurers, but it doesn’t take away the issue of how to manage their own net. The only way to solve that problem is for insurers to look at their original underwriting. Whether that means price increases or changes in retentions etc, they will need to address that,” he said.

The tightening of reinsurance terms and conditions and increased attachment points adopted in the last couple of years is unlikely to be relaxed, said Wong-Fupuy. “There is still a feeling that while last year’s positive underwriting results are more than welcome, the segment is still catching up after several periods of technical losses,” he said.

“The move away from high-frequency layers has been critical to re-align the interests between cedents and reinsurers. It has allowed the latter to restore profitability and stabilise results, something that would not have been possible via rate increases only,” said Wong-Fupuy.

“Given the continued technical underperformance that reinsurers experienced since 2017 and the need to show consistent results going forward, we don’t see any signs of companies abandoning underwriting discipline,” he added.

Following the January renewal, the outlook for commercial insurance is more moderate, according to Joseph Peiser, global chief executive officer for Aon Commercial Risk. In a recent post, he predicted property catastrophe capacity may be easier for large corporates to secure in 2024 than in 2023. Property insurance pricing could see just single-digit increases, while cover for strikes, riots and civil commotions (SRCC) may be reinstated in property covers, he said.

Changes in the reinsurance market will have implications for commercial property insurance, particularly for property cat and political risks, explained Wong-Fupuy. “There has clearly been increased supply for property-cat risks, although this remains concentrated at the higher risk layers. Recent improved profitability has attracted more capacity, with moderate rate adjustments in line with inflation or cedents’ specific experience,” he said.

“However, reinsurers remain extremely cautious in respect to political violence and specialty lines exposed to war risk, given the increasingly complex geopolitical situation. Wordings continue to be tightened and supply remains very selective,” Wong Fupuy said.

While corporate insurance buyers may now find it easier to purchase high levels of nat cat cover, it will come at a price, said Vickers. “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.

Reinsurers are also taking a more cautious approach to property per-risk reinsurance, which helps protect insurers against single large losses, such as an industrial fire and explosion, explained Vickers.

“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, January renewals] and there has been huge emphasis on the remedial action taking place at an underwriting level, such as line size, rating levels, deductible and insurers approach to risk management,” he said.

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.

“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 that it is not, because US casualty underwriting has tightened so much,” said Vickers.

US casualty lines are being affected by concerns around social inflation and adverse development, explained Wong-Fupuy. “This is, however, offset by adequate supply and rate adjustments and pressures on ceding commissions, which vary broadly across the spectrum, depending on performance,” he said.

Significantly, none of the large reinsurance brokers are predicting a softening of the reinsurance market any time soon, despite an increase in reinsurance capacity last year and record issuance in the cat bond market. AM Best estimated that reinsurance capital returned to $561bn in 2023, 2% below the prior high watermark of $570bn set in 2021. But this is not expected to have a material impact on market conditions, as participants are holding their positions on rate and terms, the ratings agency said.

Last year’s reinsurance market hardening was notable for the absence of startup reinsurers, which would typically have entered the space attracted by higher rates. While high-profile management teams have announced intentions to launch new reinsurers, no material business plans have been funded at this point, according to AM Best. Private equity investors appear to lack interest in deploying capital to startups or newly formed reinsurers, it said.

The fact that the reinsurance market continues to face uncertainty around the impact of climate change, inflation, litigation funding and geopolitical risk on ultimate loss costs is one likely reason for this lack of interest, said Aon’s Peiser.

“These unknowns are creating headwinds to new investment, despite the expectation that most reinsurers will have easily covered their cost of capital in 2023. And while the reinsurance sector is viewed as well capitalised relative to the risk currently being assumed, much more capital will be required if current unmet needs are to be addressed over time,” he said.