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Reinsurers plan to push for more rate hikes

reinsurance market

MONTE CARLO, Monaco — Property reinsurance buyers will likely face an easier time with renewal negotiations this year than last, but reinsurance underwriters still say they will push for further price increases.

Most brokers and reinsurers agree that the sharp rate hikes and increases in retentions last year placed reinsurers in a more profitable position and, barring a major catastrophe, won’t be repeated during this year’s year-end renewal season. 

While reinsurance brokers indicate many cedents will be looking for flat renewals after last year’s rate hikes of 40% or more for property catastrophe coverage and retentions sometimes doubling, reinsurers say rising losses mean they need higher rates.

Last year’s reinsurance price hikes showed up in primary rates with commercial property premiums increasing by double-digit percentages in the first half of 2023, according to industry surveys.

At the same time, reinsurers reported net income return on equity of 20.5% in the first half of this year, compared with 1.2% in the same period last year, and an 88% combined ratio, compared with 89.4% in the 2022 period, according to Fitch Ratings Inc. Annual results may be affected by second-half catastrophe losses, including from the ongoing Atlantic hurricane season, but Fitch forecasts a combined ratio of 93.8% for the full year, compared with 97.2% last year.

Executives from across the reinsurance sector discussed renewals and other issues affecting the industry last month at the Rendez-Vous de Septembre reinsurance meeting in Monte Carlo, Monaco. The annual meeting in the tiny principality by the Mediterranean Sea is viewed as the beginning of the reinsurance renewal season and attracts attendees from around the world.

Property reinsurers are “in the midst of a true hard market cycle,” said Robert Mazzuoli, Frankfurt, Germany-based director EMEA insurance at Fitch.

“The balance of power has shifted to the reinsurance industry, so they can push through price increases, they can change terms and conditions in their favor, so, they have reduced the coverage, and they are charging more for what they provide,” he said.

Senior management from the four largest European reinsurers — Munich Reinsurance Co., Swiss Reinsurance Co. Ltd., Hannover Re SE and Scor SE — all gave presentations during the meeting of their view on the market, indicating that they will seek further increases. 

With average annual catastrophe losses over the past five years exceeding $100 billion, compared with about $50 billion over the previous five years, reinsurance prices need to increase more for reinsurers to remain profitable, they said.

“Last year, the price increases on property cat were around 40% to 50% year-on-year. We don’t expect increases of that magnitude at all this year, but still likely double-digit — probably call it low double-digit,” said Jean Paul Conoscente, New York-based CEO of global property/casualty at French reinsurer Scor.

Traditional reinsurance market capital stands at about $461 billion, which is lower than the 2021 record high of $475 billion, and alternative capital, such as insurance-linked securities, has stagnated at around $100 billion for the past five years, said Thomas Blunck, CEO of reinsurance at Munich Re.

“We don’t have a massive capital inflow, and that means the market dynamics are not changing,” he said.

Last year’s rate increases and changes in policy structures reflected the increased exposures that reinsurers have taken on over the past several years, but exposures continue to grow, said Guido Funke, head of the global clients division at Munich Re.

“You can take the price level that we have, the margin level that we have and then you need to add what you need to add for economic inflation, plus you have to account for extreme weather,” he said.

While rates have risen substantially over the past year, indexed reinsurance rates are still below levels in 2010, the last hard market peak, said Urs Baertschi, CEO of property and casualty reinsurance at Swiss Re.

Specifically for natural catastrophe reinsurance pricing, rates are at about the same level as 2013, said Gianfranco Lot, chief underwriting officer for the Swiss Re unit.

“We feel it’s not yet commensurate with the risk landscape we’ve seen. Adequate returns have not been reached,” he said.

Rate hikes vary

Prices changes will likely vary by cedent, most experts said.

“Pricing, in all likelihood, in the aggregate will be risk-adjusted flat, maybe even down in some areas,” said David Priebe, New York-based chairman of Guy Carpenter & Co. LLC.

Reinsurers will have to recognize positive actions cedents have taken in managing their portfolios, such as adjusting property values and better managing aggregated exposures, he said.

Reinsurers have had a profitable year so far, after significant changes in program structures and rates last year, said James Vickers, London-based chairman international, reinsurance, at Gallagher Re, a unit of Arthur J. Gallagher & Co.

“People want to lean into what they see as attractive market conditions,” he said.

Primary insurers have taken significant retentions over the past year because reinsurers increased rates so much for lower coverage layers, said Jarad Madea, New York-based CEO of Howden Tiger Capital Markets & Advisory, a unit of Howden Broking Group Ltd.

While insurance-linked securities investors have put more funds into the market, taking advantage of higher reinsurance rates and higher interest rates on their collateral, the alternative capital is directed at higher layers of coverage, he said. In addition, ILS capital can quickly leave the market if rates decrease.

“I think there’s going to be a fair amount of discipline among reinsurers, with maybe a little more segmentation across where they’re playing in the risk tower and which cedents they’re playing with,” Mr. Madea said.

The withdrawal of some reinsurers — Axis Capital Holdings Ltd. last year exited property reinsurance and American International Group Inc. has agreed to sell Validus Reinsurance Ltd. to RenaissanceRe Holdings Ltd. — and the lack of new traditional capital entering the market will also help drive rates higher, several reinsurers said.

“Without new entrants and without existing carriers growing through material capital raises, the outlook for 2024 should be continued upward pressure on reinsurance pricing,” said Joel Willens, Bermuda-based head of international property reinsurance at Ariel Re Ltd.

The effective increases could come in several forms, such as risk-adjusted rate increases, higher retentions or different mechanisms for calculating reinstatement premiums, he said.

Barring a major catastrophe in the next few months, increases won’t be as large as last year, “but I don’t think there’s going to be a retreat from the pricing that we are seeing now,” Mr. Willens said.

While reinsurers achieved significant price increases last year, 2023 has seen a continued rise in the incidence of secondary perils, such as severe convective storms, said Sharry Tibbitt, global head of property and deputy chief underwriting officer, reinsurance division, at Everest Reinsurance Co.

“Yes, Jan. 1, 2023, was strong, but it needs to continue because the losses are continuing,” she said. “It’s going to depend on the program, depend on the region, depend on the layer to determine who needs how much.”

Everest raised $1.5 billion in additional capital earlier this year.

“We have already deployed a bit of it, and we imagine it will be fully deployed by Jan. 1,” Ms. Tibbitt said.

Cedents should not view last year’s increases as “one and done” but increases will be less severe this year, said Scott Egan, Bermuda-based CEO of SiriusPoint Ltd.

“There’s a general upward trend in rate, but I don’t think it’s anything that wouldn’t be reasonably normal in the economic conditions that we’re seeing,” he said.