Better pricing is helping reinsurers turn the corner after years of failing to earn their cost of capital, according to S&P Global Ratings. Its new report finds a hard market in short-tail lines across geographies that it predicts will continue throughout 2023.
The report noted that the confluence of Russia president Vladimir Putin’s invasion of Ukraine, inflation, mark-to-market investment losses eroding capitalisation, and an above-average catastrophe year meant tough negotiations at the January renewals were ‘all but assured’.
“It appears that the hard market is here, particularly in the short-tail lines (property and property catastrophe lines). It’s not just significant rate increases that were in favour for reinsurers, but also terms and conditions, coverages, and limits,” the report said. “It seems that the global reinsurers have run out of patience after trying to catch up with the increasing lost cost trends over the past several years, resulting in multi-decade high rate increases in property catastrophe during the January renewals.”
The report pointed out that the result was significant rate improvements at the January renewals for short tail lines, with the largest increases seen in property catastrophe. According to certain industry executives, the 2023 renewals rivalled 2006 in the aftermath of hurricanes Katrina, Rita and Wilma. “However, unlike 2006 when increases were mostly in the US, January 2023 renewals price increases were global and broad,” it said.
US property catastrophe saw significant rate increases but global reinsurers were also “pleasantly surprised” by pricing in Canada, Europe, Latin America, and Asia, according to the report. Reinsurance risk loss-free pricing changes in the US property ranged from 15% to 25% and from 35% to 150% for risk loss hit. For the UK, the figures were 20%-25% and 30%-40%.
Despite favourable reinsurance pricing, investors remain on the sidelines, except for catastrophe bonds, S&P said. Casualty lines saw more ‘orderly renewals’, however, because reinsurers had enjoyed compounded rate increases over the past few years. “Unlike property, the balance of power remained with cedents as casualty reinsurance capacity was plentiful with reinsurers’ increased appetite for this segment,” it said.
Despite the improvement, S&P also observed that global reinsurers’ operating results have been below par for several years due to more severe natural catastrophes, mounting losses from secondary perils, loss creep, COVID-19-related losses, and increasing losses in some US casualty lines. M