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'Significant discipline' at Jan. 1 reinsurance renewals may set tone for '22

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'Significant discipline' at Jan. 1 reinsurance renewals may set tone for '22

Reinsurance companies achieved higher-than-expected price rises at the Jan. 1, 2022 renewals, and signs look promising for more increases later this year.

In recent past years, reinsurers had conceded lower rate increases for property-catastrophe cover than they originally anticipated. The Jan. 1, 2022, season was different.

"It would be fair to say that quite significant discipline was shown by the reinsurers at this renewal," Mike Van Slooten, head of business intelligence at Aon PLC's reinsurance solutions division, said in an interview.

Guy Carpenter's global property-catastrophe price index was up 10.8% at Jan. 1. Howden Broking Group Ltd. put property-catastrophe price increases at 9%, which it said was the biggest year-on-year change at the Jan. 1 renewal mark since 2009. Price increases for both reinsurance and retrocession exceeded investor expectations, UBS analysts said in a Jan. 6 note.

Reinsurers' impetus to raise rates was driven mainly by the effect of five years of heavy natural catastrophe activity on their earnings. A large proportion of the losses in recent years have stemmed from so-called secondary perils such as floods, wildfires and convective storms.

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Retro reaction

Prices for retrocession, which reinsurers buy to lay off their own risks, rose faster than those for reinsurance at Jan. 1, which could put further upwards pressure on the underlying reinsurance rates. Prices for property-catastrophe retrocession were up 15% on average, Howden said in its renewals report.

Retrocession capacity is becoming scarcer and more expensive, particularly at lower coverage layers and where it is offering protection against loss frequency. This is because capital markets investors who finance a large part of the market have grown weary of suffering a high volume of losses from events they had not expected to cover and from having the collateral they put up withheld until the final claims bill is known.

There could be a "hardening stance" from reinsurers at the June 1 renewals, which are dominated by Florida property business, said Dan Bailey, a partner in the reinsurance team at McGill and Partners. This would make it challenging for Florida insurers to obtain reinsurance at a price that makes sense for them.

"The retro market played its hand, and I think the primary cat market has got to catch up relatively quickly," Bailey said in an interview.

While it is unclear how the constrained retrocession capacity would affect reinsurance rates going forward, "it is underpinning resolve at the very least from reinsurers" on the prices they are charging, said Simon Hedley, CEO of reinsurance broker Acrisure Re.

Retrocession renewals were late, creating an uncertainty about reinsurers' ability to commit capacity that could last into the first half of 2022, Van Slooten said.

"A lot of retro protection will be bought or sought in the next few months, and that may well have quite a significant impact on what happens in the midyear renewals," he said.

The retrocession market's effect on reinsurance capacity was "not as much as you'd think" at Jan. 1, according to James Vickers, chairman of international reinsurance at Gallagher Re. That was in part because reinsurers had anticipated a lack of retro availability and because global reinsurers do not generally consider Europe, the main focus of the Jan. 1 renewals, their peak catastrophe exposure.

"The real test of what impact the retro market has had on capacity is yet to come," Vickers said in an interview. "It will be the [April 1 renewals] and the midyear U.S. renewals where the really big limits are put out."

A year to watch

Reinsurers were able to factor more of their concerns about secondary peril exposure into pricing at Jan. 1, but that does not mean the issue is closed.

"The whole issue of secondary perils is on the table and is not going to go away," Vickers said. "It is now becoming a key part of rating and assessing property-catastrophe covers."

What happens to pricing and terms at subsequent renewals will also be influenced by the year's catastrophe activity.

"If all things stay equal right now, the next renewal periods will be similar to [Jan. 1]," Hedley said. "But if we encounter some unforeseen [catastrophe] situations in the first half of the year, that is going to put additional pressure on."