Reinsurers held the line on pricing during the January renewals, with stability returning after the tense negotiations of the previous year

By Wendy Pugh

The globally influential January reinsurance renewals proved less fraught than the tumultuous negotiations of a year ago when a major reset in pricing and terms occurred, but “underwriting rigour” remains the mantra.

A Gallagher Re report, titled What a Difference a Year Makes, says 12 months earlier, property catastrophe reinsurance was considered an unpredictable and volatile class warranting reduced capacity and changes in coverage, attachment and pricing.

In contrast, Gallagher Re Chief Executive Tom Wakefield says, this year “looks to have provided a welcome return to more stability and predictability, allowing the expectations of all parties to be managed in a less rancorous fashion”.

Global property catastrophe risk-adjusted rate changes averaged from nearly flat to single-digit gains for non-loss-impacted programs, and 10-30% increases for those affected by losses, with a wide range of outcomes around the averages.

Marsh McLennan reinsurance specialist Guy Carpenter says the renewals reflected ample capacity and a commercial approach to trading partnerships, albeit with underwriting rigour.

“A market dynamic is emerging where pricing remains firm, but capital is plentiful,” Guy Carpenter Chairman David Priebe says.

The January renewals are dominated by the US and Europe and can set the tone for later negotiations: Japan renews in April and most Australian insurers lock in reinsurance mid-year.

IAG, which buys cover for the calendar year, says the cost of its overall program was broadly as anticipated.

“Global reinsurance markets have stabilised during 2023, allowing IAG to purchase greater reinsurance protection than we originally expected,” Chief Financial Officer William McDonnell said in January.

Differences in the environment compared with 2023 include that reinsurers’ own retrocession cover was in place earlier, their returns on equity have improved and total reinsurance capital has increased.

After years of underperformance amid rising catastrophe costs, particularly from secondary perils, reinsurers drew a line in the sand a year ago, increasing prices and lifting the point at which they would pick up cover after natural disasters. They have since remained disciplined and further boosted margins.

“Geopolitical tensions … increased, inflation is still there, and the level of natural catastrophes remains at an elevated level.”

Despite another year with more than $US100 billion in insured losses, reinsurers were generally able to avoid losses from many of the major property events, while benefiting from higher interest on fixed-income investments and an equity market recovery.

AM Best and Guy Carpenter estimate traditional reinsurance capital has increased 12% from 2022 to $US461 billion.

The total including third-party capital has reached $US561 billion, just below a 2021 peak of about $US570 billion. Existing reinsurers have driven the increase, with no “start-up class of 2023” – a change from previous years that have followed a major market correction.

Swiss Re Chief Underwriting Officer Gianfranco Lot says there’s “widespread recognition” that primary insurers are best suited to absorb frequency losses, with reinsurers best placed to act as a shock absorber.

But higher attachment points and larger retentions have in some cases led to capital strains, prompting greater demand for “capital-driven quota shares”, structured in conjunction with broker partners.

Mr Lot says even though the latest renewals were more orderly, the risk environment has not eased and natural peril losses of $US100 billion a year globally have become the new norm.

“Geopolitical tensions even increased, inflation is still there, and the level of natural catastrophes remains at an elevated level. It is therefore imperative that as an industry we maintain the underwriting rigour that we saw in the past few years in the primary market and during last year’s reinsurance renewals.”

AM Best, in looking at the year ahead, anticipates that despite the increase in reinsurance capital, firms will hold their position on rates and terms.

“Even with the much more orderly renewals in January … market participants have not indicated any softening in market conditions,” the ratings agency says in a report.