Hardest reinsurance renewal in a generation to crank up insurance pricing pressure

The reinsurance market experienced hard market conditions at the 1/1 renewals, industry analyses from reinsurers and intermediaries suggest. The weight of buyer demand far outstripped the supply of capacity, leaving insurers paying significantly more or else failing to meet their risk transfer goals.

Re/insurance broker Howden described a coalescence of geopolitical and macroeconomic shocks that led to the hardest property catastrophe reinsurance market in a generation and “one of the hardest reinsurance markets in living memory”.

Hannover Re reported an average price increase of 8% on those reinsurance treaties it chose to renew, after adjustments for risk and inflation. Among the causes listed by the German reinsurer for this “very challenging renewal” were Russia’s war against Ukraine, sharply higher inflation and continued heavy losses from natural catastrophes that took a toll on recent results posted by insurers and reinsurers.

At the core of the price rises, which were evident during discussions held at the annual Rendezvous event in Monte Carlo in September, was the market-driving segment of US property catastrophe reinsurance business, which saw rate rises of between 45% and 100%, according to reinsurance broker Gallagher Re, with increases largely driven by the costs of last year’s Hurricane Ian in Florida.

Globally, property catastrophe reinsurance rates-on-line rose by 27.5%, according to reinsurance broker Guy Carpenter, more than double the increase of a year earlier. Howden observed a bigger rise in its data, noting global property catastrophe risk-adjusted rates-on-line up by an average of 37%, the biggest year-on-year increase seen since 1992.

For European markets, storm losses in 2021 were followed by further catastrophe losses in 2022, including costly windstorms early in the year and historic hail events in France in the summer.

“Strong demand for additional limits to counter inflation, combined with some retrenchment from incumbent reinsurers, created a challenging environment for buyers that often resulted in higher attachment points, more stringent terms, paid reinstatements and substantial rate increases – up 30% on average, but significantly higher for loss-affected programmes,” according to Howden.

“Capacity was nevertheless sufficient to see most deals over the line, particularly for cedents able to demonstrate strong performance and/or leverage long-standing relationships,” Howden added.

Gallagher Re painted an even starker picture for the aviation sector, suggesting pricing had increased by as much as 200% on some aviation reinsurance business, which is overshadowed by ongoing legal battles over who will pay for the $13 billion of losses for Western planes stranded on the ground in Russia since the Ukraine conflict.

Pricing hikes were not the only risk facing buyers at this renewal – failure to find sufficient capacity to protect their underwriting books has been a reality for some insurers, as reinsurers have withdrawn or drawn down their risk appetite, despite the premium on offer.

“We had to take some conscious decisions on portfolio steering in order to respond to the market challenges,” said Jean-Jacques Henchoz, CEO, Hannover Re.

Rival reinsurer Swiss Re likewise noted “a significant rebalancing” at renewals.

“Prior to the renewal, there was a perfect storm developing that meant reinsurance wordings, structures and prices needed to be strongly reviewed during the 1.1 renewal,” said Gianfranco Lot, head of global reinsurance, Swiss Re.

“Although several clients were able to close their programmes with us in early December, the renewal period was extremely uncertain until the very end…Naturally this delay caused distress for insurers and their brokers as they didn’t know if they could complete their placements,” Lot added.

While some capacity providers pulled back, others were only willing to maintain previous allocations, resulting in an overall shortfall.

David Flandro, head of analytics, Howden, said: “The reinsurance sector has reached concurrent secular and cyclical tipping points. 

“It is experiencing sustained, heightened loss activity and war risk just as the global economy exits the ‘great moderation’ of interest rates and asset price volatility. Pursuant increases in carrier costs of capital are underpinning higher rates-on-line, lower capacity levels, and straitened terms and conditions.

“The last time we saw this level of capital dislocation was during the 2008-2009 global financial crisis. At the same time, the sector is experiencing its most acute, cyclical price increases since the 2001-2006 period if not before,” Flandro added.