The January 2023 extensions are similar to those of 2006 in the wake of Hurricanes Katrina, Rita and Wilma in 2005, S&P said, citing industry executives. Unlike 2006, when the increases were mostly in the US, price extensions in January 2023 were global and broad, S&P explains.
At the same time, casualty reinsurance prices remain firm, following compounded price increases in recent years, although rate increases in the U.S. have moderated, according to the report titled “Pricing Momentum Is Helping Reinsurers Turn the Corner.”
Such pricing momentum is necessary as reinsurers have failed to earn their cost of capital for the past five out of six years (2017-2022), leading S&P to maintain a negative view of the global reinsurance industry. “Since 2017, the industry has earned its cost of capital in just one year (2019) and we believe the industry fell short again in 2022.”
The rating agency cited a higher frequency and severity of natural disasters, increasing losses from secondary unmodeled hazards (such as wildfires, floods, and convection storms), loss creep, COVID-19-related losses, unfavorable loss trends in certain U.S. accident lines, and historically low interest rates. In 2022 alone, the industry was hit by losses from the Russia-Ukraine conflict, continued inflation, market value investment losses that affected capitalization, and another above-average catastrophe year that included the devastation of Hurricane Ian, according to S&P.
“The question now is whether the price improvements are sustainable and whether they are enough to combat the endless headwinds the industry has faced that have dampened performance in recent years,” S&P said.
S&P was cautiously optimistic that “the tipping point for a more stable industry outlook will come as reinsurers maintain discipline and demonstrate their ability to earn their cost of capital sustainably.” Evidence of such underwriting discipline was evident during the January renewals.
January Extensions
Describing the price momentum in the overtimes, S&P said there is a “hard market” particularly in short tail lines like real estate and real estate catastrophes. “It’s not just significant rate increases that have favored reinsurers, but also terms, coverages and limits,” the report added.
“It seems that global reinsurers are running out of patience after trying to keep up with the rise [loss] cost trends of recent years, resulting in decades of high rate increases from real estate catastrophes during the January renewals,” S&P said.
“In addition to pricing, reinsurers have also tightened their underwriting standards and in some cases have been willing to let go of things that don’t fit with their new view of risk. Reinsurers are wary of the increased frequency of losses from natural disasters and secondary hazards. As a result, they have adjusted their coverages, increased their attachment points and shown less or no intention to write lower tiers, and tightened policy formulations for clear exclusions for certain risks such as cyber, war and terrorism,” the report went on to say.
By moving up the confirmation points, reinsurers are trying to limit their exposure to frequency losses and hedge against inflation, S&P continued. “Terms and conditions have been tightened with clear wording for specific risk coverage, and emphasis has been placed on said risk coverage,” it said.
In addition, reinsurers have shown less interest in aggregated coverages, focusing instead on coverage by event, S&P said, noting that reinsurers’ revised risk appetite indicates a clear shift toward exposure to severity rather than frequency.
“The structural changes that took place during the January renewals will be long-lasting as it will be difficult for reinsurers to get back to their new attachment points.”
S&P predicted that significant price increases, along with these portfolio underwriting actions, will improve reinsurer underwriting performance in 2023. In addition, high interest rates should boost investment income, offsetting moderating rate increases in some of the U.S. longtail casualty insurance business. .
Alternative Capital
S&P said reinsurance capacity remains constrained on the real estate side, in part due to reduced competitive pressure from the alternative capital market — particularly collateralised and sidecar reinsurance — which has been disrupted following a series of catastrophe losses and resulting tied up capital. with loss fatigue.
“Investors, particularly in collateralised reinsurance and sidecars, have suffered significant losses in recent years and are questioning the underwriting and modeling capabilities of the sponsors. [are] becoming stricter in their selection of who to partner with,” said S&P.
“As a result, some investors have reduced their exposure to these catastrophe risk vehicles or exited this market entirely. Others have decided to switch to catastrophe bonds, which provide more transparency, liquidity and attractive returns.”
Casualty and special lines
Unlike real estate, casualty reinsurance capacity was plentiful and reinsurers showed a greater interest in this segment, meaning the balance of power remained with cedants, S&P explained.
“Victim lines have seen more orderly renewals as reinsurers, like their cedants/primary insurers, have enjoyed compound rate increases in recent years, although rate increases in the US have moderated”
On the other hand, the innovations of specialty lines saw disruption in certain lines. “Large increases in aviation, political violence and terror were due to the conflict between Russia and Ukraine, which fundamentally changed the perception of risk for those industries. On the other hand, there is an inflow of capacity in cyber reinsurance, which benefited from significant rate increases (30%-50%) in 2022 with additional rate increases expected in 2023, albeit at a significantly slower pace (5%-10%).”
Source: The Bharat Express News
