Mid-year renewals: Inflation takes its toll

As the last major renewal season of 2022 there were noticeable signs of a hardening in reinsurers’ attitudes, according to James Kent, global CEO of Gallagher Re, in the broker’s 1st View report on the 1 July renewals.

Numerous external economic and political factors that were less prominent at the start of the year have come more to the fore and started to make their presence felt in the global reinsurance market.

The first and most widely reported is inflation.

The global insurance and reinsurance industry is well used to managing high inflation rates in emerging markets but for the first time since the late 1970s and 1980s high rates of inflation are being seen in major mature economies.

Primary companies in previously low inflation economies are having to adapt their pricing and underwriting processes to the new reality; with reinsurers applying an extremely detailed analysis of the actions that companies are taking.

“The result of this has been technical discussions between buyers and reinsurers on the inflation loadings to be applied to specific treaties over and above movements in exposure,” noted Kent.

“Action varies client by client, with more favourable reinsurance pricing offered to those companies viewed as having underwriting procedures in place to account for the current inflationary environment.

“Overall, the gradual move of reinsurers away from low level natural catastrophe layers allied with a reduction in overall peak-zone capacity continued, with rate increases being observed even on loss free accounts.”

Retro crunch continues

A similar trend was seen on property per risk covers which has been amplified by the continued limited availability of property per risk retrocession cover and the ongoing run of severity losses.

Contract language regarding the definition of loss and the aggregation of claims has come under even more scrutiny following the COVID-19 losses and the series of European storms earlier in 2022.

The 1 June ’Florida Book’ renewals typically acts as a bell-weather for peak-zone hurricane pricing and set the scene for the 1 July mid-year renewals, according to Kent.

“Despite being loss free for 2021/2022, the Q2 renewals saw significant rates increases and a very late renewal; the challenging and opaque regulatory situation in the admitted homeowners’ market was the single largest factor as opposed to actual weather events themselves.

“Encouragingly, capacity was ultimately available for the companies perceived as best in class; but for other buyers some of the pricing was nearing distress levels.

“Long tail casualty placements - particularly those with strong primary rate movement - remained largely popular with reinsurers but the debate around ceding commissions was greater than was the case in the recent renewals as reinsurers concerns grow over higher rates of inflation and its effect on claim awards.”

Toughest market for reinsurers since 2008

The changing economic environment is starting to impact reinsurers’ balance sheets as well as their profit and loss accounts in different ways.

Increasing interest rates are generating more investment income but at the same time are driving a reduction in the value of bonds and in some cases equities, impacting capital levels, notes Gallagher Re.

Similarly, higher interest rates are increasing the discount rate applied to reserves, but at the same time inflationary pressures are potentially increasing claims size. A recessionary environment would further add the potential for increased claims frequency.

”This cocktail of competing factors is affecting reinsurers appetite for volatility with the consequent reshaping of their portfolios away from catastrophe lines,” said Kent.

”Despite these difficulties nearly all buyers were able to secure cover, albeit at an increased cost in many cases and sometimes not at the levels of attachment they were seeking.”

There are limited signs of new capital entering the reinsurance market to offset the current firming trend.

”There are concerns that in some specific lines of business where buyers are seeking additional capacity that a restricted supply is leading to stresses not seen for several years,” concluded Kent.

”In this changing environment despite reporting satisfactory 1st Half Year 2022 results, reinsurers now appear to be more sensitive to losses and wider external events than at any time since 2008.”