One indicator of a hard insurance market is a rapid increase in reinsurance costs. Typically, the reinsurance market drives insurance pricing trends. If reinsurers increase their costs significantly, insurers react by increasing the primary premium. That results in one of the core attributes of a hard insurance market – rate increases.
This pattern experienced a slight anomaly in 2019. The reverse happened in that many of the major domestic insurers in Canada started filing for rate increases in the third and fourth quarter, before the January 01 reinsurance renewals.
“That’s the first time that’s really happened,” said Phil Cook, chairman of Omega Insurance Holdings Inc. “Usually, the hard market starts to get driven by rapid or significant increases in reinsurance costs, and the insurers reacting to that by increasing the primary premium. In 2019, it was the actual insurers who were increasing the premium.”
Someone analysing that trend in December 2019 might have reached a fair conclusion that the January reinsurance renewals would throw up some significant rate increases. But the opposite took place. It was a relatively benign reinsurance renewal season for Canadian risks.
Global risk and reinsurance firm, Guy Carpenter & Company, LLC, described the January reinsurance renewals as “asymmetrical”. The most pronounced reinsurance rate increases – those that would typify a hard market – were localized to specific regions or markets that have experienced successive years of losses and significant deterioration in performance, such as the US liability market.
“Reinsurance price increases in most areas are currently lagging those in the primary market,” commented Lara Mowery, managing director, head of global property specialty at Guy Carpenter. “This is evidenced by Marsh’s Global Insurance Market Index, which shows global commercial insurance pricing across all lines of business and all regions rose by 8% in the third quarter of 2019.”
As Cook pointed out at the Insurance Institute of Canada ‘Industry Trends & Predictions: 2020’ meeting, it’s fair to ask why reinsurance costs aren’t increasing, considering the significant catastrophic losses that the industry consumed in 2019.
“One reason for that is the fact that most of the catastrophic losses in 2019 were in personal lines, and not commercial lines” he explained. “When you look at flood or wildfire losses, [the most significant losses come from] expensive homes. The US wildfire experience was disastrous on the West Coast, but it was a lot of very expensive homes that were damaged. The Australian [bushfire] experience right now is impacting mainly homes and not businesses. Reinsurance tends to be bought differently for personal lines versus commercial lines. [Sometimes] it’s not bought at all on the personal lines side, other than for catastrophic exposure which is usually associated with earthquake and not with wildfires.”
A second reason for the relatively benign reinsurance renewal season is the exponential growth of the insurance linked securities (ILS) market. More and more capital is being diverted and injected into the ILS market, which means they’re taking on more of the exposure that reinsurers used to take on.
“The entry of tens of billions of dollars of alternative capital into the sector goes a long way to explaining the resilience of the reinsurance market over the last few years,” Mowery told Insurance Business. “This culminated in alternative capital rising by 150% between 2012 and 2018 and played a crucial role in driving down reinsurance pricing at the same time. The sustained growth of alternative capital meant losses were spread more broadly across the reinsurance sector.”
The January 01 renewals would suggest that reinsurers are doing “relatively better” than the primary domestic insurers in Canada, according to Cook. Whether that trend continues remains to be seen. But one thing is certain, said Cook, which is that “neither of us are making enough money right now.”