Reinsurers to hold the line on prices, terms at Jan. 1 renewals

Reinsurers are expected to staunchly defend the progress they have made on prices and terms and conditions at the upcoming Jan. 1, 2024, renewals.

After late, tough negotiations the previous year, which tested market relationships, reinsurers secured large rate increases and tighter terms and conditions as they sought to reverse years of subpar returns and tackle rising inflation and natural catastrophe claims.

A year on, while the Big Four reinsurers are all reporting double-digit returns on equity, they are keen to avoid any slippage. "The reinsurers do not want to give back any ground that they have gained," Michael Cross, president of reinsurance broker Acrisure Re's North America business, said in an interview.

Giving nothing away

One of reinsurers' key wins from the Jan. 1, 2023, renewal was raising the point at which cover pays out, known as the attachment point, for property-catastrophe reinsurance. The aim was to leave as much of the bill for smaller, more frequent natural catastrophes as possible with insurers, as these events had played a big role in reinsurers' recent underperformance. While a few reinsurers are pushing for even higher attachment points, they have no appetite to lower them. "They're holding pretty firm there," Cross said.

Attachment points for property-catastrophe cover are typically expressed in terms of how frequently an event that would trigger them is expected to occur, known as the return period. "A lot of companies will not go below 10 years' return period for [natural catastrophe]," Tor Mellbye, manager of group reinsurance and global accounts at Swedish insurance group Länsförsäkringar AB, said in an interview. Prepaid reinstatements, which restore coverage limits if they are exhausted without the need for additional premium, are "absolutely no-go on the cat side," Mellbye said.

Property-catastrophe price increases at the upcoming renewals are expected to be more muted than those seen at Jan. 1, 2023, when rates went up 37% on average, according to figures from reinsurance broker Howden Tiger. But here too, reinsurers will be reluctant to give much ground. "There will be less pressure to push price up significantly, but I think you will meet relatively strong resistance levels if you try to push price down significantly," David Govrin, chief underwriting officer of Bermuda-based insurer and reinsurer SiriusPoint Ltd., said in an interview.

Mellbye said risk-adjusted price increases would be about 10%. He said the market has leveled out somewhat but remains "very, very disciplined."

A smoother process

Even so, many of the pressures that made the Jan. 1, 2023, renewals so tough have eased to an extent, which should make for a less fraught process this time around.

While 2023 was not quiet on the natural catastrophe front, with the industry claims bill expected to exceed $100 billion again according to Swiss Re AG, there have been relatively few large individual catastrophes. This, plus raised attachment points, has helped reinsurers' profitability. The Big Four European reinsurers all reported double-digit returns on equity in the first nine months of 2023, in contrast to the previous four years.

"With the degree of market adjustment in 2023, and a return to reinsurer profitability, there is generally adequate capacity at pricing and structures similar to 2023 outcomes," Lara Mowery, global head of distribution at reinsurance broker Guy Carpenter & Co. LLC, said in written responses.

The lower level of severe natural catastrophes has also made it easier for reinsurers to obtain retrocession cover, allowing them to offer capacity more quickly and confidently. Uncertainty about retrocession was part of the reason that buyers and brokers struggled to get a clear understanding of reinsurers' stance until late on in the previous Jan. 1 renewals.

Buyer-reinsurer communication in the run-up to the Jan. 1, 2024, renewals has improved from the previous year, which was "probably the worst year ever," Mellbye said. This year, "we had much better dialogue with a lot of companies, and in general, things are more like normal again," he added.

However, there will be a range of property-catastrophe renewal outcomes. Much will depend on the claims insurers have presented to reinsurers and their own efforts to limit claims and increase prices. "Cedents who have done a good job this past year in reacting to what the reinsurers were looking for are going to be treated a little bit more favorably than others," Cross said. But he added that for those who have done less well and have experienced significant losses, "there's going to be ongoing pressure from a pricing standpoint."

Shift in focus

With the hard work on property-catastrophe cover largely done, reinsurers' focus could shift to areas such as casualty, where economic inflation and social inflation continue to drive up claims costs. Patrick Tiernan, chief of markets at Lloyd's of London, has urged Lloyd's syndicates to prepare for a tough casualty renewal.

"While 2023 renewals focused on property and a substantial shift in pricing and structures occurred, reinsurers' attention is now more strongly geared towards casualty and overall market sustainability across lines," Mowery said.

Reinsurers putting out larger coverage limits would be a sign of softening in casualty, Govrin said, but reinsurers had been keeping limits in check. "That's just another sign of continued discipline on casualty and pressure from things like social inflation," he said.

There will be other thorny issues for insurers, reinsurers and brokers to tackle at renewal, such as the continued wrangling about how war and systemic risks should be dealt with in cyber policies.

Also, having factored the Russia-Ukraine war into political violence and terrorism pricing at the Jan. 1, 2023, renewals, the market now has the Israel-Hamas war to consider. The conflict has led to reinsurers maintaining the harder market conditions that followed the Russia-Ukraine war, Mowery said, but added that the Israel-Hamas conflict "has and must be met with pragmatism due to the various nuances of this event and region."