Why your reinsurance bills are up this year

January 1 reinsurance renewals are proving to be “one of the most challenging reinsurance markets” the insurance sector has experienced, says Guy Carpenter, a Marsh McLennan global risk and reinsurance specialist firm.

Property insurers in particular can expect rates to escalate due to large losses that occurred in 2022, which led to some reinsurers to reduce or withdraw capacity.

Property was the most challenging sector for reinsurers, with market adjustments made specifically to pricing, attachment and coverage.

“Ultimately, coverage changes that presented the most extreme erosion of value were not widely taken up and market-wide adjustments were largely limited to terror and strike, riot and civil commotion (SRCC) clauses,” Guy Carpenter notes.

The report suggests there isn’t enough reinsurance supply to meet demand in the property catastrophe sector, leading to pricing volatility.

“The imbalance of supply and demand in property catastrophe drove a stressed market and, in some cases, led to pricing and structural changes unsupported by technical considerations,” say Guy Carpenter.

Some reinsurers reduced or withdrew their property capacity in 2022, the report says, while others used these market conditions as a way to change or increase their participation. As reinsurers take on more capacity, the market will further stabilize, Guy Carpenter predicts.

Average price adjustments and increased attachment point movements — i.e., the point at which reinsurance limits apply — were substantial across the property portfolio and warrant a market correction; however, this may not be logical nor sustainable, Guy Carpenter suggests.

Overall, consistency in coverage and achieving concurrent terms — i.e., no gaps or overlaps in coverage — are priorities for primary insurers for this renewal period, Guy Carpenter reports, adding that many non-concurrent coverage issues have been resolved.

However, “there is still work to complete,” Guy Carpenter says. “This is not yet a settled market.” 

Dedicated reinsurance capital shrunk in 2022. Traditional dedicated reinsurance capital was $435 billion at mid-2022, an 8% decrease from the end of 2021, Guy Carpenter and AM Best predicted. Since then, the rise in interest rates and continued risk of recession has caused asset values to decrease even further, which is creating more downward pressure on capital levels.

“Looking past the renewal of January 2023, it’s important to remember…we have been at crossroads before,” Dean Klisura, Guy Carpenter president and CEO, commented in a press release. “In prior reinsurance cycles, significant catastrophe loss events such as Hurricane Andrew, the attacks of Sept. 11, 2001, and Hurricanes Katrina, Rita and Wilma were the catalysts for market corrections that preceded new capital entering the sector.”

The projected 2022 annual large loss total rose to $112 billion globally, driven by Hurricane Ian, Guy Carpenter reports. Major European flood and hail events, Australian floods and severe U.S. storms also contributed to 2022 loss totals. This does not include the impact of the most recent December large loss events. 

This number exceeds 2021’s projected annual large loss total of more than US$100 billion.

Other major Cat events in 2022 — including Hurricane Fiona, which caused an estimated $660 million in insured damages — are driving up loss totals for Canadian insurers. A derecho storm in Ontario and Quebec this spring caused more than $875 million in insured damage and was closely followed by extreme flooding in Manitoba which put pressure on claims adjusters.

“It is imperative the industry stay focused on providing workable client solutions, thorough coverage and balanced pricing for the long-term sustainability of cedents and markets,” Klisura adds.

On the casualty side, underwriting requirements varied. Treaty results were dependent on prior-year results, underlying rate changes, and overall portfolio performance. Most casualty lines experienced pressure on pricing; overall, capacity was stable with little to no change in terms/conditions once market-clearing pricing was determined.

 

Feature image iStock.com/bgblue