Global property and casualty reinsurers saw “good” rate increases during the January 2021 renewals but they came up short of a hard market, dashing reinsurers’ hope of a strong start for 2021, according to a report from S&P Global Ratings. As a result, reinsurers’ expectations remain high for more increases during the year.

Reinsurers had high hopes that the January renewals would turn the tide and lift all boats to more profitable years, said S&P. However, many existing reinsurers and newly formed companies raised fresh capital in 2020 in anticipation of a hardening market, which ultimately dampened their negotiating power and limited the price increases they sought, said the report titled “Reinsurers Left Wanting More Despite Global Reinsurance Pricing Gains At January Renewals.”

As a result, rate increases were concentrated in loss-affected lines of business that most needed them while loss-free lines saw lower price rises.

New Capital Dampens Price Hikes

Reinsurers raised an estimated $23.6 billion of fresh capital in 2020, including $15.4 billion in equity and $8.2 billion in incremental debt to shore up their balance sheets and capitalize on firming reinsurance pricing, said S&P, quoting statistics from Aon.

“The $15.4 billion of new equity was issued by existing reinsurers and new startups, split between 75% from existing players and 25% from a few new start-ups. Furthermore, the speedy recovery of the capital markets helped reverse the potential hit to reinsurers’ capital position,” S&P continued.

“This proved to be a negotiating advantage for reinsurance buyers,” the report said. “Moreover, the new entrants rose to nip at the heels of much larger reinsurers as they attempted to shoulder their way into more market share and establish their growing footprint.”

Terms and Conditions

However, the report indicated that tightening terms and conditions were also a major factor of the renewals as reinsurers focused increasingly on communicable disease and silent cyber exclusions.

“Reinsurers found themselves talking less about significant pricing improvements and more about contract wording and coverage definitions, especially for communicable disease and silent cyber risk exclusions,” said the report.

“On short-tail lines, communicable disease exclusions were more broadly accepted. However, the story is more nuanced for long-tail lines, depending on the account and class of business because the communicable disease exclusions were relatively less accepted [by cedents],” it continued.

However, cedents often responded to tightening terms and conditions by retaining more of their risk, “because many of them believed that the primary insurance risk might have reached rate adequacy,” the report went on to say.

S&P Global Ratings said the global reinsurance sector didn’t earn its cost of capital in 2020, and has struggled to do so in the past four years due to large natural catastrophe losses, adverse loss trends in certain U.S. casualty lines (notably general liability, professional lines and auto liability), and fierce competition among reinsurers exacerbated by alternative capital, which over the years has reduced margins in the property-catastrophe line of business.

COVID-19 Claims

And of course, over the past year, that list of pressures on reinsurers’ underwriting profitability has been augmented by COVID-19-related claims.

In 2020, the top 20 global reinsurers incurred about $15.5 billion of COVID-19-related losses (mostly incurred but not reported), with many reinsurers yet to report their fourth-quarter earnings. However, S&P believes that, given the combination of pandemic losses, elevated natural catastrophes, other insurance losses, and lower reserve releases, the sector will swing to an underwriting loss for the year.

As a result, S&P’s sector view of the global reinsurance sector remains negative.

“Therefore, higher technical underwriting margins are greatly needed to make up for the shortfall in investment income, elevated natural catastrophe losses, and additional pandemic claims, which we believe collectively will carry the positive reinsurance pricing momentum throughout 2021.”

As a result, global reinsurers will need to keep a vigilant eye on underwriting discipline, judiciously pushing for more rate increases during the upcoming renewals, the report noted.

Source: S&P Global Investors

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