1st January 2023 renewals – what we know so far

Posted 04/01/2023 – Quick takes

There have been a number of reports from both journalists and (re)insurance brokers summarising the main data points from the most recent reinsurance renewals (or ‘1/1’s).

1/1 is the reinsurance industry’s biggest annual renewal; 30-40% of US renewals take place and nearly all European programmes and global retrocession programmes are renegotiated.

As late as the autumn of 2022, despite increasing inflationary pressures, most brokers and underwriters were expecting percentage rate rises for non-marine property reinsurance in the teens.

Howden, in a report entitled The Great Realignment highlights a c37% rise in global property treaty rates (vs. 9% in 2022, the biggest year-on-year increase since 1992), a c50% rise in retrocession rates (in a range of 20-90%) and a c45% rise in global property D&F rates (a cumulative increase of 160% since 2017).

Source: Howden

Guy Carpenter report that the renewal season was “extremely late” but that ultimately placements were largely completed “without many of the requested modifications in coverage.” Guy Carpenter also reports, however, that there “is still work to complete; this is not yet a settled market.”

Guy Carpenter describe property as the most challenged sector, with market adjustments to pricing, attachment points and coverage. Guy Carpenter further explains that the “imbalance of supply and demand in property catastrophe drove a stressed market and, in some cases, led to pricing and structural changes unsupported by technical considerations.” Gallagher Re, in its report Market Turns, highlight that the “two areas of most constraint were peak-zone US property catastrophe capacity and coverage for strikes, riots & civil commotion and war.”

Howden blame the “biggest capital squeeze since 2008” (it calculates a c$66bn fall in the capital available at the end of 2022 vs. the end of 2021) for these rate increases and highlight the impact on (re)insurance capital from multi-decade high inflation, rising interest rates & falling investment markets, losses due to the war in Ukraine, the cost of Hurricane Ian and the cumulative impact of other natural catastrophes since 2017. Guy Carpenter calculate that dedicated reinsurance capital contracted in the first half of 2022 by 8%, with that contraction continuing in the second half of the year.

Gallagher Re talk of a renewals market that became more and more bifurcated between a fraught property market and a calmer casualty treaty market where renewals were “completed at terms seen as tough but fair by most buyers.”

Source: Gallagher Re

Source: Gallagher Re

Two areas of the Specialty market that are worthy of individual comment are aviation and cyber.

In aviation, still the subject of considerable uncertainty in the wake of the Russian invasion of Ukraine, the main focus was said to be on both coverage and pricing. Reinsurers, according to Gallagher Re, were looking to impose “tighter restrictions” whilst “significantly re-inflating the premium volume flowing into the aviation reinsurance market … with increases in prices being applied to both clean and loss impacted programmes.” It goes without saying that war exclusions are currently the subject of significant legal wrangling between leasing companies and (re)insurers.

In cyber, again according to Gallagher Re, reinsurers have “looked more closely at exposure growth across their portfolios with pressure on Loss Ratio caps to decrease.” Reinsurers have been “supportive of … war exclusions … following the Lloyd’s bulletin communicated earlier this year.”

Alpha comment

Given that the six years from 2017 to 2022 (on latest estimates) account for 6 of the 10 largest loss years on record, Alpha has long questioned why treaty and retrocession rates have been so slow to respond – severely lagging the correction in most of the other direct classes and resulted in an underweight recommendation.

Source: Howden

With the majority of commentary being provided thus far by (re)insurance brokers, the views of our underwriters will also be key since the broker community can often downplay a hardening market in an attempt to prevent further market hardening.

Alpha will be providing its clients with a comprehensive report on the 1/1 renewals and overall market conditions later in January – but suffice to say that these price moves are undoubtedly a positive for capital providers to the (re)insurance industry.

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