Frustration is setting in for commercial insurance buyers subjected to multiple years of price rises, especially those that have improved their risk profiles by de-risking and elevating risk management, according to a recent report published by Howden. That frustration appears to be spreading to reinsurance buyers.
A separate report from Gallagher Re revealed the January renewal season was marked by tense negotiation tactics as reinsurers sought to improve pricing while buyers were determined to resist, which has “strained several long-term relationships.”
Guy Carpenter described the renewals as “orderly” once cedents’ terms were issued. But cedents saw differentiated pricing and capacity allocation outcomes, depending on whether or not the account had experienced a loss.
“Reinsurers have managed to achieve further improvements in pricing to build on the increases of the past 18 months, particularly on accountings ceding losses, but may be wondering if they have over-stressed some long-term client relationships, which might create difficulties in the longer term,” said James Kent, global CEO, Gallagher Re, in a statement. He described the renewal season as more challenging than most, but one that ultimately “provided another rational outcome.”
Coming into the Jan. 1, 2022 renewal season, “reinsurers’ hopes of more profitable 2021 results were dashed by an uptick in natural catastrophe losses, many from secondary perils, which saw most companies exceeding their annual natural catastrophe budgets,” explained the Gallagher report titled “Gallagher Re 1st View – Mixed Markets.”
As a result, the senior management of many reinsurers strongly advocated “the need for pricing improvement, especially on volatile underperforming contracts,” the report added. “In several cases, senior managers followed this up by retaining tighter central control on their line underwriters, which resulted in more protracted negotiations and instances of capacity reduction.”
However, the Gallagher Re report noted that reinsurers’ determination to seek pricing improvements did not apply equally across the market. For example, quota share placements on non-catastrophe lines of business, which have shown consistent improvement in original pricing and conditions over the last few years, were keenly sought.
“Quota share placements for U.S. professional lines and casualty, along with some other global specialty lines, saw buyers achieving higher commissions on the back of continued rate increases for many primary lines, reduced cession percentages and/or heightened capacity supply,” said Gallagher. “In many cases, the signing allocations on these more sought-after treaties were used to help the placement of more stressed lines of business such as casualty excess of loss, cyber, property cat and property risk.”
Howden said re/insurance pricing is being driven by perceived levels of risk across the market.
“Reduced flows of capital into the sector in the lead up to renewal, along with rating agencies’ and regulators’ increasingly vocal interventions on the rising frequency and severity of catastrophe events, strengthened reinsurers’ resolve to hold ground on loss-affected business and demand higher returns,” said Howden in its report titled “Times are a-changin'”.
“The result was a late property renewal,” with rate changes typically up from the January 2021 renewals while capacity was down for lower-layers or aggregate products as reinsurers and retrocessionaires moved away from frequency covers, the report continued.
“A host of factors contributed to unusually late renewals this year, with 11th hour secondary perils complicating the process further. the market is faced with known unknowns like climate change, inflation and lingering COVID concerns, all of which are creating uncertainty,” commented David Flandro, head of Analytics, Howden, in a statement accompanying the report.
“Nevertheless, with insurance capital currently at record levels, and premiums rising on the back of higher pricing and heightened risk awareness, this remains a resilient and well-capitalized marketplace that can manage these challenges,” he added.
In addition to Howden, both Gallagher and Guy Carpenter mentioned the fact that the January renewals ran late.
“The property renewal process ran up to 14 days behind typical timing, creating a flurry of activity with two weeks (and fewer working days) left in the year,” said the Carpenter report titled “An Evolving Market Leads to Divergent Outcomes.”
“Key drivers of the later renewal included shifting risk views impacting pricing models and capacity allocations, uncertainty around trapped capital/loss estimates, and a very late retrocession renewal,” according to Carpenter.
“Negotiations concluded very late with a wide range of outcomes as parties settled largely on a client- and portfolio-specific basis,” said Gallagher Re.
Source: Carpenter, Gallagher Re and Howden