It wasn’t so long ago that risk and insurance managers were accusing insurers of a knee-jerk reaction leading to a sudden hike in prices, with little warning, ushering in a hard market almost overnight.
Corporate buyers scrambled for cover, prices shot up, and terms and conditions hardened. Many felt let down by the industry with little respect for loyalty to insurers or for well-managed risks. Above all, it was the speed with which the market changed that upset buyers.
Insurers, for their part, pointed to a prolonged soft market with woefully insufficient rates, expanded coverage and broad terms and conditions, combined with growing losses and emerging risks. On the whole this point was accepted by buyers, although they questioned all risks being lumped together with little differentiation. They also questioned a market that had let things get to such a state that they had to have such a dramatic reaction.
Fast forward a few years and suddenly it is insurers that are finding the reinsurance market has reacted much as the primary market did for corporates. The latest January reinsurance renewal has seen a dramatic hardening of rates in a number of lines.
Reinsurers point to Hurricane Ian, with estimated insured losses of $50bn-$65bn and the second-costliest catastrophe loss event ever for the insurance industry after Hurricane Katrina in 2005.
In the words of Swiss Re, the benign period from 2012 to 2016 in terms of cat losses “led to industry underestimation of ever-growing property exposures due to a rise in values at risk in exposed locations, and continued urban sprawl and economic growth, all against a backdrop of hazard intensification as the planet warms”.
Then came tropical cyclones and secondary perils such as the Californian wildfires in 2017, 2018 and 2020. “Even before Ian, however, our expectation was that supply and demand for reinsurance would converge at higher prices as the market adjusts to under-priced risks, and also due to constraints on capital,” said Swiss Re.
Hurricane Ian appears to have been the final nail in the coffin. Gallagher US noted: “Before Ian we were expecting price increases to moderate and to see more stability in the property market.” But as broker USI put it: “Hurricane Ian shattered the hope for a swift return to a more stable insurance market environment.”
The 1 January 2023 reinsurance renewal has been pretty brutal by all accounts. This is just a selection of the choice comments from reinsurance brokers recently:
- “In two months (November and December) the European property market re-set ten years of downwards cycle”;
- “The market has faced a very late, complex, and in some cases frustrating renewal”;
- “The renewal process has been gruelling for participants”;
- “A very tense renewal, with little flexibility shown by reinsurers”;
- “A renewal process that was delayed by weeks. Clients felt this was driven by a combination of tactical delays by some reinsurers to force change”;
- “The aviation reinsurance market is going through a period of seismic change”.
- “One of the hardest reinsurance markets in living memory”;
- “Hardest property-catastrophe reinsurance market in a generation”;
- “The last time we saw this level of capital dislocation was during the 2008-2009 global financial crisis”.
- “Property catastrophe market saw ‘unsupported’ prices”;
- “Not all outcomes were logical or sustainable”;
- “More extreme coverage modifications threatening to erode the core value of the reinsurance product”.
Of course, the issue of concern for commercial insurance buyers is: how does this affect me? There will be an impact on the primary market, but only in certain sectors such as property nat cat and trade credit, for example. At the moment, brokers suggest that the primary market is well positioned in terms of where it wants rates to be and capacity-wise.
So there appears to be less concern that a hard reinsurance market will further harden the primary market. It will, however, inevitably slow the moderation that has been seen in the last year or so, and certainly hold off any soft market. And there will be little incentive for insurers to in any way improve terms and conditions.