The geopolitical and macroeconomic shocks of the past year have led to a highly challenged and complex January 1 renewal period, according to global broking group Howden.
In its renewal report titled The Great Realignment, Howden noted how high inflation, interest rate hikes, depleted capital, fractured energy markets, the Ukraine war, and Hurricane Ian have coalesced to tip the reinsurance sector into “significant volatility,” resulting in “one of the hardest reinsurance markets in living memory.”
In the midst of these challenging conditions, there was capital erosion of 15.7% to US$355 billion in 2022. This, according to Howden, marked the first full-year decline since 2008. Significantly higher premiums drove the sector’s solvency margin ratio (capital divided by premiums) below 100 as reinsurers were also left more exposed to liquidity and credit risks.
Howden head of analytics David Flandro said the sector had reached “concurrent secular and tipping points” amid heightened losses and war risk, with pursuant increases in carrier costs of capital underpinning higher rates-on-line, lower capacity levels, and more.
“The last time we saw this level of capital dislocation was during the 2008-2009 global financial crisis,” added Flandro. “At the same time, the sector is experiencing its most acute, cyclical price increases since the 2001-2006 period if not before.”
Rate increases reach multi-decade highs
At the January 1 renewals, structures and coverage terms became the focal points of property-catastrophe negotiation with the recognition that prices would increase considerably.
“Reissued firm order terms, non-concurrent terms and diversification plays leveraging demand for catastrophe capacity as a way to improve access and margins for non-property business reflected shifting market conditions,” the Howden report noted.
Howden said its Global Property-Catastrophe Risk-Adjusted Rate-on-Line Index grew by an average of 37% at the January 1 renewals, compared to the 9% recorded in the previous year. This was the highest year-on-year increase recorded by the global broking group since 1992.
In Europe specifically, the market suffered significant catastrophe losses as a result of the European windstorms early in the year and the hailstorms that battered France over the summer. There was also strong demand for additional limits to counter inflation, as well as some retrenchment from incumbent reinsurers.
Together, these factors led a “challenging environment for buyers,” the Howden report said, with higher attachment points, more stringent terms, paid reinstatements and a rate increase of 30% on average. However, capacity was “sufficient to see most deals over the line,” particularly for those who were able to “demonstrate strong performance and/or leverage long-standing relationships.”
By comparison, renewals in the US market were even more challenging as increased demand coincided with supply constraints. Howden noted an average rate-on-line increase of 50%. This was the biggest rate-on-line change since 2006, reflecting the record high losses caused by Hurricane Ian.
According to Howden, strained US market renewals saw some buyers failing to fill their programs and named-peril coverage becoming more prevalent. This, in turn, led to certain insurers resorting to shortfall covers. The lack of capacity for lower layers also meant cedents were forced to retain more.
Additionally, late or incomplete retrocession placements led to property-catastrophe reinsurers having “less clarity than usual” with regards to their net positions when offering renewal lines, causing the process to lag behind schedule.
The retrocession space was “already dislocated” by the impact of Hurricane Ian going into the January 1 renewals, Howden said, which meant “a sizeable portion of collateralised retrocession capital was trapped.” This resulted in risk adjusted retrocession catastrophe excess-of-loss rates-on-line rising by 50% on average.
Overall, there was “multi-decadal high reinsurance risk-adjusted rate increases” at the January 1 renewals. Aside from the increases in property-casualty and retrocession, rates in the direct and facultative (D&F) market rose 45% on average. Meanwhile, London market casualty rates grew 5% on average.
“Unlocking capacity in order to find solutions for rapidly changing risks that may soon outgrow the sector’s capital base will be crucial to maintaining relevance and offering clients coverage that meets their needs,” said Howden Broking CEO José Manuel González. “This is especially true for 2023, given the considerable macroeconomic and sector uncertainty, as well as the challenging start to the year for the reinsurance sector.”