A newly released report by Howden, titled ‘A Tipping Point’, has revealed the drivers behind the significant shifts taking place in the reinsurance market ahead of year-end renewals. The research demonstrates how the three Cs - climate, conflict and capital - are coalescing to create a tipping point for the reinsurance market, with 2022 mid-year renewals seeing rate increases accelerate to their highest levels since 2006.
Having initially stood firm in the face of headwinds that began in 2017, including painful weather losses, a global pandemic and accompanying financial market volatility, persistent catastrophe loss frequency and major macroeconomic and geopolitical realignments this year have exacerbated pressures and, crucially, altered assumptions around yields, capital and loss costs. Risks are escalating as the world lurches from one crisis to another, bringing about a fundamental shift in supply and demand.
Howden Re CEO Bradley Maltese said, “After years of excess capacity, loss uncertainty and the changing world order have combined to create some of the most challenging market conditions in two decades. Pricing and risk appetites are responding accordingly. No two cycles are the same, however, and new capacity could very soon be enticed into the market, given current rating levels and the higher potential returns on offer.
“Capital providers’ price expectations have continued to shift in line with structural changes to the loss environment, meaning that 2023’s reinsurance renewal cycle is likely to see further pricing pressures. Loss experience from here will be crucial: Whilst pressure will increase if the wind blows this year, it will be more muted off the back of a loss-free second half.”
Climate
The property-catastrophe market is currently in the eye of a price, risk and inflation storm, and reduced capital inflows, along with rising ‘secondary’ peril losses, the three-year average of which has nearly doubled since 2013, have strengthened reinsurers’ resolve to meet rising costs of capital.
All of these factors are starting to tell, with signs of distress at mid-year renewals. Property-catastrophe pricing for Florida business rose by an average of 25% at 1 June. A cumulative increase of 90% in the last five years has seen Howden’s 1 June ROL index rise to its highest level since 2007.
Conflict
Whilst Ukraine war claims are likely manageable overall for the (re)insurance sector, the concentration of losses amongst premium-light lines of business will lead to disproportionate pain. Current industry loss expectations range from $10bn at the low end to upwards of $20bn; reported claims (of $2.5bn to date) have a long way to travel before they get close to these figures.
With unexpected war losses coming fast on the heels of unexpected pandemic losses from COVID-19, reinsurers’ exposure to loss aggregation in such a volatile risk landscape has contributed to the transitioning reinsurance cycle in 2022. Both events have revealed how perils once regarded as ‘distinct’, e.g., business interruption, supply chain failures and price shocks can be connected, and strike simultaneously.
Capital
Capital impacts have been significant, as asset markets adjust to the end of the ‘great moderation’. 2022 already represents a local low for dedicated reinsurance capital. An 11% impairment during the first six months of the year, together with significantly higher premiums, sent the sector’s solvency margin ratio (capital divided by premiums) back to levels last recorded in the depths of the global financial crisis.
Even assuming a recovery in financial markets in the second half, which is far from assured, capital losses are unlikely to recover fully this year. Any year-on-year decline in reinsurance capital at the end of December would represent the first full-year reversal since 2008 and provide further impetus for market firming. M