For the last six months, the accepted view has been that the hard market is slowly and surely on the way out, with prices moderating in most lines (with the exception of course of cyber).
At time during the last few years it seems that the insurance sector has been keen to play down the hard market. For a long time it was referred to by many brokers and carriers as a hardening market, or firming pricing conditions. And then before it seemingly had a chance to actually become a hard market, in the traditional sense, the talk of moderating prices appeared.
Risk and insurance managers undoubtedly saw it very differently. For them it was often a sudden and very real hard market, with difficult renewals and challenging conditions. And they were very aware that a hard market is not just about pricing but also terms and conditions, which became severely tightened.
The hard market is clearly moderating but buyers will point out that ‘moderating’ does not mean reducing. Prices are still increasing, just not as fast. Some lines and risks may even be seeing flat renewals but this still leaves prices high. But for those hoping for a return to softer market conditions, there is not good news on the horizon.
The reinsurance market has long been the driver in the industry. Conditions in the reinsurance market often filter down into the primary sector. Of course, this is not true in all lines and risks, and the influence may have reduced in recent years. In the past, hard markets were driven by the reinsurance market, following a major shock such as Piper Alpha in the 1980s or Hurricane Andrew in the 1990s.
Indeed, the role of reinsurance is to protect insurers from volatility, but when a major event occurs and the reinsurance market is dramatically affected, then that impact is inevitably passed down to the primary market.
What is surprising about the current hard market is that the reinsurance market has, as one reinsurance broker puts it, “defied the historical rulebook”. Reinsurance pricing has lagged behind the primary commercial market in several classes of business. Even in a class like property-catastrophe business, the reinsurance sector’s increases have been way behind property insurers’ increases, despite increasing hurricanes, cyclone and secondary events.
But this may be all about to end. The reinsurance market has been remarkably resilient in the last few years, helped by alternative capital, and looking to grow market share. But as the reinsurance sector meets at Monte Carlo this week to begin discussions for 2023 renewals, observers note that a tipping point has been reached.
The warning signs have been there for a while – a surge in retrocession market pricing, climate change creating a ‘new normal’ for nat cats, Covid-19, and now Ukraine and inflation. The expectation in the reinsurance market would appear to be that 2023 renewals are going to be extremely tough and pricing is under enormous pressure.
There will inevitably be an impact of this on the primary market. It may not be as dramatic as it has been in the past but it will certainly push up prices in certain sectors, not least nat cat-affected property. And it will almost certainly mean that the there is very little prospect of any sort of softening market in the near future.