Early indications from New Year renewals better than expected.
Global property and casualty (P&C) reinsurance rates have continued to climb sharply as we come through the new year renewals season, beating many analyst estimates. These material increases are driven by a diverse range of factors, including the economic and risk appetite effects of the COVID-19 pandemic; fears around climate change impact, a rise in cyberattacks and the growing frequency and severity of losses from natural disasters. The ever-rising rate of economic and social inflation has also contributed to the spike.
All of these have led to tense renewal negotiations for some, often going on until the proverbial 11th hour, with reinsurance buyers pushing back against the price increases. It has also had a knock-on effect on insurers, brokers and policyholders throughout the Middle East, albeit at more manageable high-side single-digit rises.
Time to review terms in MENA?
With the larger and more complex risks in the Middle East dependent on global capacity, the region is often sensitive to the overall market movements experienced across the board at January renewals. In response, brokers have focused on carrying out a full market appraisal of suitable capacity in order to achieve a balanced reinsurance placement using capacity from regional and international markets, hence minimizing the effects of localised pricing volatility.
JENOA is uniquely positioned here and combines local knowledge that clients in the Middle East, North Africa and additionally Turkey (or MENAT) region seek and unites this with the in-depth international broking expertise and relationships we hold with the global reinsurance market.
The regional risks covered by Middle East and North Africa (MENA) reinsurers have not experienced the same level of price increases as those globally. However, associated terms and conditions remain under intense scrutiny, with legacy limits introduced during softer market cycles being closely reviewed and critical covers being negotiated based on clients’ business dynamics.
At the same time, many regional underwriters continue to reward well-managed risks with stable pricing and capacity. Clients with the best risk profiles also continue to remain desirable to reinsurers. Yet, average prices continued to rise. Reports from various global reinsurance brokers after the January renewals highlighted that the 2022 renewal average rate increase ranged between 9% and 11%, more than double the 5% rise experienced the year before. Particularly affected were loss-hit P&C programmes, where prices were up 10% to 25% in the US (compared to 2.5% to 10% in loss-free programmes) and as much as 15% to 50% in Europe (as against 0% to 5% for loss-free).
Globally, Guy Carpenter, one of the largest reinsurers, reported a 10.8% rate increase, more than double the 4.5% rise the year before. Howden, another big player, also recorded a 9% increase in its global P&C risk-adjusted rate-on-line index, surpassing the 6% rise in January 2021.
Middle East rate increases less pronounced
In the MENA region, the rises were less pronounced, with rates on loss-hit accounts increasing from 5% to 20%, while loss-free ones were flat to 7.5%. Risk-adjusted retrocession catastrophe excess-of-loss rates-on-line also climbed 15% as buyers experienced a difficult renewal.
Another key factor was reinsurance capacity, up 2.8% in 2021, from year end 2020 to an estimated US$ 534 billion, driven by a growth in traditional and alternative capital.
Specifically, in MENA, there was sufficient proportional and excess of loss capacity. However, it was reduced where reinsurance treaty limit/ceded premium balance was deemed unacceptable. At JENOA, we expect that capacity will continue to expand further in 2022 due to the arrival of new market entrants. This will inevitably intensify competition for market share alongside existing reinsurers keen to maintain their client base. Therefore, underwriters will have to hold their nerve and maintain their underwriting discipline while remaining competitive.
Capacity will inevitably be further boosted by the addition of the Abu Dhabi Reinsurance Company and some primary insurers now being able to write local reinsurance business. As a result, and in the absence of any large losses in the first and second quarters, underwriting discipline may start to relax in 2022.
Globally, where programmes were renewed, there was sufficient capacity to complete them, with fewer clients experiencing gaps in capacity, or at worst having to self-insure portions of their placement.
Generally, these clients manage their risks well and are deemed as acceptable risks to write by reinsurers. Yet capacity was harder to come by for the loss-impacted lower layers, aggregates, multi-year and per risk deals. Among those areas, retro and cyber aggregates were those who experienced more reticence in securing adequate capacity.
Aggregate retro capacity has also reduced substantially as Insurance-Linked Securities (ILS) funds that provided the bulk of capacity have suffered from a diminishing investor base, with ILS capital being redeployed instead into industry loss warranties, catastrophe bonds and primary reinsurance. As a consequence, collateralised occurrence and sidecar retro capacity were in short supply, resulting in some reinsurers pulling back on capacity for their primary buyers.
Rising catastrophe losses
Reinsured losses from natural catastrophes peaked at US$ 120 billion in 2021, the second highest year on record, prompting reinsurers to re-evaluate their underwriting strategies at renewal.
Among the main drivers were secondary perils such as the European floods, wildfires, and convective storms, all of which were precipitated by the rising impact of climate change.
Despite these huge losses, however, the reinsurance marketplace remains strong, with capital available at record levels and increased premiums achieved.
The ever-increasing prevalence and scale of cyberattacks, particularly ransomware, has also driven rates up, with experts warning that re/insurance premiums could double before 2023. At the same time, the rising cost of inflation, heightened by ongoing supply-chain disruption and labour shortages, has continued to exert pressure on companies’ bottom lines, mainly affecting short-tail business.
Social inflation is also adding to reinsurance claims costs as eager lawyers vigorously pursue class actions on behalf of their clients through the courts, impacting long-tail lines the most. This is reflected in the fact that between 2014 and 2018, US plaintiff awards have almost doubled, with some exceeding US$ 1 billion.
COVID-related claims from 2020 have been reviewed and, where valid, have been settled, enabling claims reserves to stabilise. Nevertheless, concern over continued inflation rises has been voiced, specifically by reinsurers in the Lloyd’s and London markets.
Added to this, reinsurers have reduced appetite for loss-making accounts and are subsequently pulling back from or exiting the market altogether. At the same time, clients are waiting until later in the binding lifecycle of a bid to obtain the best pricing and terms and conditions possible.
Conversely, in response to these increased losses and costs, reinsurers have pressed to put up their rates to reflect the current risk environment. This has created a “who will blink first?” approach from both sides.
JENOA has worked closely with clients well ahead of renewal deadlines to ensure that risk information and underwriting data was complete, up to date and demonstrated that risk management strategies had been adopted to improve the risk.
Insureds that managed to find sufficient capacity and the best deals at renewal were those best able to explain their risk to the underwriter. This required them to pull together the most relevant information to present their case in detail. While in the main, reinsurers have successfully managed to build on the price improvements they have achieved over the last 18 months and buyers have attained sufficient capacity in return, the January renewals have tested many long-term relationships.
All the signs for now, however, are that the reinsurance market will try to maintain pricing resilience further as 2022 progresses.