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Jan. 1 reinsurance renewals expose market pressures

Tough trading conditions are starting to take their toll on some parts of the reinsurance market, the outcomes of the Jan. 1 renewal season have shown.

Roughly half of the world's reinsurance renews at Jan. 1 each year. While the date is primarily dominated by European business, coverage from a wide range of countries and territories comes up for renewal as well.

Broker and rating agency reports said the renewals went smoothly and that, by and large, insurers were able to get the cover they needed from the reinsurance market, though at a higher price in some cases. S&P Global Ratings said while renewals were "late" and saw "jostling until the very end," they were "nevertheless orderly."

"In general, there was no reinsurance capacity constraint but neither was it cheap or easily available in certain cases," the rating agency said.

Diverging performance

However, there are signs that some parts of the market are beginning to feel the pressure of the trading environment. Because of persistently low interest rates and heavy catastrophe losses in 2017 and 2018, among other things, reinsurer performance has started to diverge, according to Mike Van Slooten, head of market analysis in broker Aon PLC's reinsurance solutions division. That's making buyers wary, and there is a risk investors could lose patience with a consistently underperforming reinsurer, and "pull the plug," Van Slooten said in an interview.

"It's not lack of capital that's driving people out of the business. What's driving people out is an inability to make money," he added. "That pressure is being recognized and is causing people to be a bit more choosy about who they are trading with."

Van Slooten said there had been some reduction in treaty reinsurance capacity at Jan. 1, but it is "very small scale" right now.

Troubles in the casualty market could exacerbate any profitability problems. Rising claims costs, thanks in large part to an increase in litigation, have pushed up primary insurance prices, particularly in the U.S. Though reinsurance price increases overall were relatively muted at Jan. 1, 2020, casualty rates jumped.

Reinsurance broker Willis Re Inc.'s renewals report found that prices for business with previous losses increased between 15% and 30% in U.S. general third-party liability, between 5% and 15% for U.S. motor liability and between 0% and 10% for U.S. professional liability.

Concerns about U.S. casualty business have been well publicized; large reinsurance price increases were also seen elsewhere. Loss-affected U.K. motor liability prices rose by between 5% and 35%, Lloyd's and London Market casualty rates were up by between 5% and 20%, and prices for loss-affected French casualty business increased by between 5% and 25%.

Lara Mowery, head of global property specialty at reinsurance broker Guy Carpenter & Co. LLC, said rising primary casualty rates in response to losses was not unique to the U.S. "This deteriorating performance is beginning to filter into the reinsurance market," she said in an email.

Although rising rates are a positive sign, a reduction in casualty reserve releases, which Van Slooten said have supported earnings for more than a decade but would not provide "anything like" the same boost going forward, will eat into profits.

"For anybody who is already struggling to cover their cost of capital, that is like another support to earnings being kicked away," he said.

Continued price rises

If reinsurers were not satisfied with the overall price increases at Jan. 1, there are expectations that rates will continue to rise as casualty concerns continue to develop and catastrophe-hit areas renew their reinsurance covers later in the year.

Mowery noted that the 5% rise in her company's global property catastrophe rate on line index at Jan. 1 was driven by the diversity of business that renews on that date and the resulting wide range of outcomes. Reinsurers will likely press for larger increases at the Japan-dominated April 1 renewals and the Florida-focused June 1 date, where there have suffered heavy catastrophe losses in recent years, she said.

On the casualty side, Mowery noted that with continuing loss trends and "growing signs that the reserving cycle may have reached an inflection point," liability market conditions "are likely to remain challenging" for 2020 and beyond.

Overall, Mowery sees the reinsurance market in a "solid position" as the new year starts.

The sector remains well capitalized overall and additional capital may be deployed in the coming year should the pricing environment become more appealing to investors," she said.