Lower investment yields, adverse catastrophe loss development, higher loss cost trends, concerns over climate change, and, of course, the pandemic coalesced to bring some of the sharpest price increases in recent memory during the Jan. 1 reinsurance renewals, according to Howden, the London-based insurance broker.

“The result is not only significantly higher pricing, but also more restrictive terms and conditions,” said Howden in a report titled “Hard Times. How a pandemic, record low yields, and climate-driven cat losses have changed the (re)insurance market.”

“With pricing momentum in both commercial insurance and reinsurance likely to hold through 2021, businesses will continue to feel the strain at a time when many face huge and potentially existential financial pressures,” the report continued.

The report noted that industry balance sheets remain generally strong, with the sector continuing to attract substantial new investment capital. “Confronted with this backdrop, reinsurers were mostly disciplined and discerning at Jan. 1, 2021 reinsurance renewals, portending similar discipline in the near-term.”

The report’s key findings on reinsurance renewals include:

  • Howden’s Global Risk-Adjusted Property-Catastrophe Rate-on-Line Index rose by 6% at Jan. 1, 2021. This was higher than the flat outcome of 2020, and the biggest year-over-year increase in over a decade. COVID-19 loss experience, along with yet another hyperactive natural catastrophe year, were key inflating drivers.
  • Programs in North America led the charge at Jan. 1, 2021, with an average rate-on-line increase of 8.5%. Pricing pressure was more subdued outside the United States.
  • A significant turning point was reached in Europe where with rate rises in the low-to-mid-single digit range were seen.
  • Another year of constrained capacity in the retrocession market saw Howden’s Risk-Adjusted Non-marine Retrocession Catastrophe Rate-on-Line Index rise by 13%. Four consecutive years of price increases have seen the cost of retrocession protection return to levels last recorded in 2012/13.
  • Casualty reinsurance rates-on-line, including adjustments for exposure changes and ceding commissions, rose by 6% on average at Jan. 1, 2021.
  • Rising rates on underlying business, especially in the U.S., mitigated pressure on ceding commissions somewhat, although outcomes varied depending on book performance. Reinsurers were resolute in pursuing higher pricing for excess-of-loss programmes, although there was again some degree of differentiation to account for portfolio characteristics and profitability.

Resilient Capitalization

“A multitude of factors informed this year’s re/insurance renewals. Despite the asset shock that occurred immediately post-lockdown and full-year underwriting losses of US$100 billion or more, capitalization has proved resilient,” commented David Flandro, managing director, HX Analytics, in a statement accompanying the report.

“Incumbents and new players raised close to US$20 billion of capital in 2020 for all purposes, with more to come this year. This is therefore not a universally dislocated market; differentiated risk management strategies and advice can still unlock access to capacity, even if the landscape has undeniably become more challenging,” he added.

Systemic Risks

The report highlighted the fact that 2020 was a reminder of the systemic risks facing the industry. “The lives of billions of people have been redefined by COVID-19, a global health crisis that brought with it shutdowns, financial market turbulence, economic dislocation and civil unrest,” the report noted. “The pandemic is a reminder that certain perils do not conform to long-held assumptions around correlations, boundaries and duration.”

Another systemic risk – climate change – was highlighted during 2020 – a year when “the frequency of extreme weather events pushed the boundaries of historical precedent,” said the report.

“Whilst the pricing environment may be supportive for carriers in 2021, this should not translate into a degree of risk aversion where underwriters accept rate but shy away from new risks or new business,” said José Manuel González, CEO, Howden Broking Group, in a statement.

“The global risk landscape is changing like never before. Carriers and brokers have always served clients best by learning from shock events and 2020 is surely a year rich in its lessons. There is much to draw from: COVID-19 has brought the growing ‘intangibility’ of risk into focus, a trend that is only going to accelerate as new technologies continue to redefine risk characteristics,” he added.

Source: Howden

*This story ran previously in our sister publication Insurance Journal.

Topics USA Commercial Lines Business Insurance Pricing Trends Reinsurance