Risk landscape reset amid complex and changing renewals, says Howden

An already complex underwriting environment has been complicated further by the mix of heightened secondary catastrophe perils, rising core inflation, temporarily subdued social inflation and a dislocated cyber market. This is according to Howden’s annual report on the risk transfer market and 1 January 2022 reinsurance renewals. The broker said all these elements have reset the risk landscape, and the main theme of renewals is change. It said rate expectations heading into 2022 are balanced between a highly fluid risk landscape on the one hand, and strong underwriting results on the other. As a result, carrier margin improvements could help offset pressure to raise rates in 2022, with insurance buyers now four years into higher prices, Howden added. “Strong capitalisation continues to provide some relief: this is not a synchronised hard market where all boats are lifted equally, but one that is more discerning and reflects the performance and profitability of each programme or risk. There were signs of let-up in 2021, as some of the more acute price rises moderated in the first half of the year, with cyber the standout exception. Rate movements have since ebbed and flowed, with pressure points emerging in areas subject to rising inflation and sizeable losses (e.g. property-catastrophe),” said Howden. It added: “This reflects market conditions confronting businesses currently. Frustration is now setting in for buyers subjected to multiple years of price rises, especially those who have improved risk profiles by de-risking and elevating risk management.” The broker noted that its data showed that global commercial insurance prices have now risen for 14 consecutive quarters, pointing out that classes with the highest rate increases last year included cyber, property and professional indemnity, while premiums for workers compensation were subjected to less pressure and even declined in certain regions. It explained that tight market conditions continue to be a product of checked risk appetite (itself a reaction initially to weak results and earnings volatility) rather than capital constraints. Indeed, higher rates and improved underwriting margins are likely to continue to attract new capital in 2022, said Howden, but this is unlikely to be a harbinger for soft market conditions. Howden pointed out that the new entrants have not had a significant impact on price so far and are long-term (not opportunistic) players and, as a result, underwriting disciplined has prevailed. It noted that despite successive years of rate rises, carriers continue to deploy capacity cautiously. For global commercial insurance there was a premium-weighted rate rise of 12% in 2021, with some moderation in most business lines throughout the year. Howden said the primary commercial sector, which has seen the bulk of price increases since 2017, is already showing signs of waning rate momentum in most business lines, albeit from a high level and with pockets of rate hardening in challenged classes. Looking at the reinsurance market renewals, Howden said “changing inflationary and loss trends had a tangible effect on supply-and-demand dynamics in more challenged areas, with some buyers seeking to secure additional coverage in response to increasing exposure assumptions”, adding: “Capital providers’ appetite was meanwhile moderated by requirements around structure, terms and price, in addition to a desire to control volatility.” Climate change and the rise of so-called secondary or non-peak perils were recurring themes during property reinsurance renewals, said the broker, not surprising given a year of more than $100bn insured catastrophe losses, reinforcing carriers’ concerns around price adequacy and catastrophe model efficacy. “With the increased volatility of secondary events more closely associated with climate change, this will be an area of continued market focus and action in 2022,” it said. David Flandro, head of analytics at Howden, said: “A host of factors contributed to unusually late renewals this year, with 11th-hour secondary perils complicating the process further. The market is faced with known unknowns like climate change, inflation and lingering Covid concerns, all of which are creating uncertainty. Nevertheless, with insurance capital currently at record levels, and premiums rising on the back of higher pricing and heightened risk awareness, this remains a resilient and well-capitalised marketplace that can manage these challenges.” Looking ahead to 2022, Howden said the insurance macro-fundamental environment is clearly shifting. “A series of megatrends – higher inflation, lacklustre investment yields, elevated catastrophe loss activity, climate change, new cyber threats and heightened risk aversion – are making the landscape more challenging to predict. However, healthy capitalisation – $26bn of new capital entered the market in 2020/2021 – puts the sector in a strong position to tackle these changes,” said the broker. José Manuel González, CEO of Howden Broking, said: “Irrespective of market cycles, clients expect the insurance sector to innovate, to develop creative solutions and to offer sufficient capacity during what is one of the most significant periods of change in living memory.” He added: “We see climate risk as one of the primary concerns for (re)insurance in this decade. Insurers must be prepared to re-evaluate climate-related risks proactively, and to provide a level of flexibility in underwriting solutions in order to maintain coverage ability, while also creating new and innovative products. This will be no easy feat and insurance will be a critical component in driving the mitigation and adaptation needed to confront climate change risks and deliver long-term profitability.”

Risk landscape reset amid complex and changing renewals, says Howden

Rate expectations heading into 2022 are evenly balanced

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