The January global renewals season was “the most challenging in a generation” for insurers, with natural perils cover particularly hit by higher rates and deductibles. Here’s what’s in store for Australia’s mid-year renewals

By Wendy Pugh

Global January reinsurance renewals, which have been described by participants in chilling terms, are pointing toward testing times for Australian insurers as they prepare for crucial mid-year renewal negotiations after a slew of natural catastrophes.

While most Australian insurers renew their reinsurance contracts at mid-year, US and European insurers typically renew in January. So local insurers have a good impression of what they’re in for. 

Property cover in January was particularly challenging in the US and Europe, while in all markets rates rose and retentions increased and capacity was constrained for some types of risk.

Munich Re Australia Chief Executive Scott Hawkins says influences driving the reinsurance market during the recent negotiations were apparent during Australia’s previous mid-year renewals, and they haven’t dissipated.

“We have seen a hardening market globally, as well as locally,” he tells Insurance News. “If we think back to last year, the Australian market prices had gone up here already, and I would see that momentum continuing into the 1/7 renewal.

“We’re in a heightened, uncertain environment, and if I think about the things that are causing the uncertainty – increased nat cat frequency, inflation – they are still there. And we still have a war in Ukraine, which could negatively impact financial markets, depending on what happens.”

Munich Re, Swiss Re and Hannover Re are the largest local market reinsurers, while a number of other providers working through large broking firms also take on risks. 

IAG, which renews its main program from the new year, has reported that its maximum first event retention has risen to $236 million, after allowing for quota share arrangements. That’s up from $135 million as of July. The non-quota share reinsurance expense for fiscal 2023 is estimated at $790-$820 million, compared to $659 million previously.

Chief Financial Officer Michelle McPherson says increasing the retention was a rational economic decision, reflecting inflation and global reinsurance markets, and it balances stakeholder interests, including minimising the reinsurance cost impact on customers.

QBE was due to report on its program when delivering its annual financial results shortly after this edition went to press. Suncorp, focused on mid-year renewals, already said last year that reinsurance rates have “increased significantly” and that the material hardening of the global market following “elevated natural hazard activity” in recent years has led to changes.

Globally, some reinsurers have reduced their risk appetite for natural perils, but Scott Hawkins says that hasn’t been the case with Munich Re, which has even been prepared to increase participation in some programs.

“I think the risk appetite changes that have been seen globally will be similar in Australia, but Munich Re’s risk appetite in Australia hasn’t changed,” he says. “In fact, if we see risk-adequate pricing we’re also prepared in Australia to take advantage of that and for some clients increase our capacity.”

Major broker Aon says reinsurers are seeking to improve their profitability after a string of poor results since 2017. Recent reinsurance negotiations took place amid rising inflation, a significant erosion of equity driven by sharp interest rate rises, and limited retrocession availability following Hurricane Ian, which became one of the worst US natural disasters on record after it made landfall in Florida on September 28.

Aon estimates global reinsurance capital fell 17% to $US560 billion ($811 billion) over the nine months through September 30, mainly driven by substantial unrealised losses on investment portfolios. 

Insurance-linked securities markets also failed to see the influx of capacity that has been a feature in the past.

In Australia, flooding in Queensland and New South Wales in February and March has become the nation’s costliest natural disaster, triggering $5.7 billion in claims. The event followed bushfires, an earthquake, a cyclone in Western Australian, and other wild weather. Further events have since added to claim totals.

Hannover Re Australian Branch Managing Director Michael Eberhardt says while the company hasn’t reduced its capacity, indications from the insurance-linked securities and retrocession markets suggest the string of natural catastrophe losses has “changed some perceptions”

“I would say the risk appetite has reduced and there are more questions also on the retrocession side in terms of exposure to Australia, particularly at the lower end of a program and in aggregate programs that react predominantly to frequency,” he says.

Lower layers of a catastrophe program are triggered by what’s known as secondary perils, including floods, storms and bushfires. Peak upper layers represent the type of large-scale losses generally driven by hurricanes, cyclones and earthquakes, which traditionally have been more extensively modelled.

Opportunities for insurers to obtain more favourable terms from reinsurers by spreading programs more widely are limited in the current market.

Mr Eberhardt says constrained global capacity can mean a higher concentration is placed with those reinsurers that have the financial capability and risk appetite to do so, and hard market impacts in Australia will mainly be seen in structure/attachment points and price. Trends seen in January renewals are likely to persist.

“Generally, reinsurance returns have been insufficient for a number of years and now this is probably one of the strongest price corrections we have seen in a decade – or even more than a decade,” Mr Eberhardt tells Insurance News

“Reinsurance markets are global, capital is global and the developments that occurred during the 1/1 renewal are influential for the 1/7.” 

Swiss Re’s Head of Property & Casualty Underwriting, Asia, Australia and New Zealand Mark Senkevics says catastrophes such as Hurricane Ian, hailstorms and floods in Europe and flooding in Asia and Australia were factors for the January renewals, along with the overall global capital pressures.

“On top of that global capital story, we saw individual regional influences that played through and resulted in a hardening across most markets,” he tells Insurance News.

“The nature of that hardening differed. It was probably more pronounced in the US and Europe than in Asia, but nonetheless we saw very strong hardening and restructuring of terms and conditions in the Asian markets.”

“The renewal process has been gruelling for participants, many of whom have not faced such a rapid change in market conditions across a single renewal season.”

Globally, most programs were fully placed in the recent renewals, although some buyers seeking additional capacity didn’t do so ultimately because of the pricing increases. Retentions have also increased and remain a key focus.

“This is a necessary result of both inflation and the fact that these deductibles have not moved for many years, meaning that the increase in frequency with large secondary peril losses have started to really impact the lower layers of catastrophe programs,” Mr Senkevics says. 

“We’ve also seen that play through on aggregate covers as well.”

The industry is still smarting from pandemic-related policy wordings that led to legal battles around the world. They have driven home the importance of policy clarity, with rising insurance losses from traditionally less well understood secondary perils adding to the changed dynamics.

“I know many reinsurers look at Australia and have some element of nervousness about the types of losses that we’ve had in recent years,” he says. “We’re not talking about earthquakes and cyclones, which have been well known and understood as modelled losses, but what we describe as the secondary perils.

“The response to that is pricing and increasing retentions, and making certain that wordings and contracts are clear.” 

Mr Senkevics says it is difficult to predict how supply and demand will play out for the mid-year, given the uncertainties influencing the market, but clients will likely seek an early start to discussions.

“I would encourage them to do so – just to make certain that they are in a position to truly understand the impact of changing terms and conditions, structures and pricing on their own P&L and balance sheet, and what it means for their ultimate primary pricing.”               

Gruelling and challenging

Mounting pressures exacerbated by Hurricane Ian reinforced one of the hardest reinsurance markets in living memory in January, London-based international broker Howden says, while Gallagher Re says the renewals were “very late, complex and in many cases frustrating”. 

Aon says they were the most challenging in a generation.

Howden Head of Analytics David Flandro says the reinsurance sector has reached concurrent tipping points.

“It is experiencing sustained, heightened loss activity and war risk just as the global economy exits the ‘great moderation’ of interest rates and asset price volatility,” he says. “Pursuant increases in carrier costs of capital are underpinning higher rates-on-line, lower capacity levels, and straitened terms and conditions.”

Reinsurers battled to lock in their own retrocession coverage, which contributed to the late conclusion of the January renewals.

Howden says multi-decade high reinsurance risk-adjusted rate increases were recorded in January, including a 37% gain for global property catastrophe – the biggest year-on-year jump since 1992 – while retrocession was up 50% and direct and facultative rose 45%.

Gallagher Re says the most constrained areas were peak-zone US property catastrophe capacity and coverage for strikes, riots and civil commotion and war. 

In most other lines and regions, buyers were able to source capacity, albeit at a higher cost and in many cases with changed structures, including higher attachment points (the point at which excess insurance or reinsurance limits apply). 

“The renewal process has been gruelling for participants, many of whom have not faced such a rapid change in market conditions across a single renewal season,” Gallagher Re Global Chief Executive James Kent says.

Guy Carpenter says the supply and demand imbalance in property catastrophe “drove a stressed market”, and in some cases led to pricing and structural changes unsupported by technical considerations. Average price adjustments and increased attachment point moves were substantial across the portfolio, worldwide.

“Looking past the renewal of January 2023, it’s important to remember that we have been at a crossroads before,” Guy Carpenter Chief Executive Dean Klisura said.  

“In prior reinsurance cycles, significant catastrophe loss events such as Hurricane Andrew, the attacks of September 11, 2001, and Hurricanes Katrina, Rita and Wilma, were the catalysts for market corrections that preceded new capital entering the sector.”