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Jan. 1 renewals yield mixed results for reinsurers, buyers

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Jan. 1 renewals yield mixed results for reinsurers, buyers

Price increases at the Jan. 1 renewals were lower than what reinsurers were pushing for, but still represented an improvement from previous years while still being affordable for buyers, according to market participants.

Reinsurers had been hoping for price increases of 10% or more on European natural catastrophe business, according to the Jan. 4 report on the renewals by Willis Towers Watson PLC's reinsurance broker, Willis Re. However, these aspirations "became unrealistic" amid lower-than-expected price increases in the retrocession market, a more resilient insurance-linked securities market than originally anticipated and increasing appetite for European natural catastrophe exposures.

Willis Re said prices for European property-catastrophe programs without losses increased by between 0% and 5%, while prices for loss-hit programs were up by between 5% and 10%. In the U.S., where price increases have been higher in recent renewals because of a high volume of natural catastrophe claims, Willis Re said property-catastrophe prices were up by between 5% and 15% for loss-free programs and by between 10% and 25% for loss hit programs.

Similarly, Howden Broking Group Ltd. said global property-catastrophe prices were up 6% at Jan. 1, as rate increases of 8.5% in North America were offset by "more modest rate increases" in Europe, Asia and elsewhere that were "typically in the low-to-mid-single-digit range."

Changing direction

But both brokers remained upbeat about the way prices are moving. Howden said the 6% global property catastrophe increase it observed was "the biggest year-over-year increase at [Jan. 1] in over a decade," and "the almost habitual experience of flat-to-down renewals relented" in Europe.

"I can't think of something that we saw a rate reduction on," Jason Howard, CEO of reinsurance broker Acrisure Re, said in an interview. "The direction of travel on rates has moved back the other way for the first time in a long time."

Howard added that reinsurers would not be "jumping up and down" with happiness about the renewal outcome because they are still seeing challenges that they want to build into pricing, such as the effects of low interest rates and claims inflation on their longer-tail business. However, he said, "They will be satisfied that the direction of travel has changed."

While rising prices are generally bad news for the insurers buying reinsurance, some had an easier ride than originally forecast.

Tor Mellbye, manager of group reinsurance and global accounts at Länsförsäkringar Sak Försäkrings AB (publ), said in an emailed statement that his company had "a very successful renewal of our reinsurance program under very challenging circumstances."

Länsförsäkringar was hit by a large bakery fire claim in August 2020 which was "probably the most expensive fire loss in Sweden ever," Mellbye said. In addition, the coronavirus pandemic was putting upwards pressure on reinsurance prices and reinsurers were asking for cyber and communicable disease exclusions, he said.

The Swedish insurer paid 12% more for its reinsurance, "which is less than our budget and far below expectations from many reinsurers," Mellbye said. "We were also quite successful in getting acceptance for our own tailor-made exclusion clauses," he added.

Price increases in the insurance market have also taken the sting out of reinsurance rate hikes for buyers. Mike Van Slooten, head of business intelligence for broking group Aon plc's reinsurance solutions division, said demand for reinsurance had "held up very well and maybe even increased in some areas."

While there have been concerns that prices going up too much would deter buyers, Van Slooten said that thanks to rate increases in their own books, "they can actually afford to continue buying reinsurance to protect against volatility."

A rapid retreat?

The question now is how sustainable the price increases are. In the run-up to the renewals, reinsurers were optimistic of prolonged market hardening, but some are now less sure they are right.

Barclays insurance analyst Ivan Bokhmat said in a Jan. 7 research note that renewal data showed "a loss of price momentum" compared with the mid-year renewals between April and July 2020, when rates were "up double digits." He added that if losses are in line with modeled expectations, "it is increasingly likely that the hard reinsurance market would be limited to 2021."

Having thought in the third quarter of 2020 that the hardening would continue for "a couple of years," the lack of more momentum in pricing "might dampen the length of the hardening cycle," Howard said. On the other hand, he noted that the industry had only paid limited coronavirus-related claims in 2020, so "if COVID losses start to come through in a material way that might prolong what happens."

Van Slooten said it was difficult to draw comparisons between price changes in the midyear renewals and Jan. 1 because the latter is dominated by European business, which, unlike territories such as the U.S., the Caribbean and Japan, has not produced major claims for reinsurers "for more than 10 years."

Van Slooten also pointed out that the pressures on the reinsurance market that have helped fuel price increases, including reserving uncertainty, low interest rates, and low returns on equity at reinsurance companies in recent years "remain in play" and that there remains an abundance of reinsurance capacity.

"You will see, I think, upward movement in pricing on quite a broad front but it is not going to be dramatic," he said.