Hard Market for Property Reinsurance Seen Continuing through 2023

The hard market for short-tail reinsurance lines will likely continue through 2023, while casualty reinsurance pricing remains firm, though price increases have moderated in the United States, according to a report from S&P Global Ratings.

In the report, titled Pricing Momentum Is Helping Reinsurers Turn the Corner, S&P notes that despite favorable reinsurance pricing, investors have remained on the sidelines except for catastrophe bonds.

The January 25, 2023, S&P report also indicates that the rating agency is maintaining its negative view on the global reinsurance sector. "We maintain our negative view on the global reinsurance sector, but we believe the tipping point is coming for a more stable sector view if reinsurers maintain discipline and demonstrate the ability to sustainably earn their cost of capital," S&P says.

S&P describes a "perfect storm" that hit the reinsurance sector in 2022, leading to reinsurance pricing continuing to harden at January renewals. The Russia-Ukraine war, ongoing inflation, mark-to-market investment losses that eroded reinsurers' capitalization, and another above-average catastrophe year that included Hurricane Ian all contributed to pricing pressures for reinsurers that were seen in renewal negotiations at the start of the year.

Beyond the 2022 factors, however, global reinsurers' operating results had been subpar for a number of years, S&P says. Those poor results were the result of more frequent and more severe natural catastrophes; increasing losses from unmodeled secondary perils such as wildfires, floods, and convective storms; "loss creep"; COVID-19-related losses; and adverse loss trends in some US casualty lines.

"All of these factors, plus historically low interest rates, resulted in reinsurers failing to earn their cost of capital in the past 5 out of 6 years (2017–2022), driving S&P Global Ratings' negative view on the global reinsurance sector," the report says. "The question now is whether the pricing improvements are sustainable, and whether they are enough to combat the endless headwinds the sector has faced that have muted performance for the past several years."

S&P says that while it is cautiously optimistic, reinsurers must maintain underwriting discipline, take proactive underwriting actions, and continue to seek price adequacy in upcoming renewals.

The rating agency says that the hard market that is particularly apparent in short-tail property and property-catastrophe reinsurance lines is marked not just by significant rate increases but also changes in terms and conditions, coverages and limits. "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 multidecade high rate increases in property catastrophe during the January renewals," S&P says.

While demand increased from ceding companies at January renewals, reinsurers remained disciplined, S&P says, focusing on exposure management. They've also taken a more uniform approach to pricing actions, according to the rating agency, rather than a regional one as they have in the past.

"According to certain industry executives, 2023 renewals rival those of 2006 in the aftermath of the 2005 Hurricanes Katrina, Rita, and Wilma," the S&P report says. "However, unlike 2006 when increases were mostly in the [United States], January 2023 renewals price increases were global and broad."

Reinsurers also showed a preference to write middle and upper layers, moving attachment points upward to limit their exposure to frequency losses and head against inflation, the report says. Tightened terms and conditions included clear wordings for specific risk coverage, with emphasis given for named-peril coverage, S&P says.

In property-catastrophe reinsurance programs, first and second layers were difficult to place at January renewals, S&P says, with many buyers seeing what had been their second layer become their first. "As a result, cedents have increased their retentions because of the growing price tag of protection," S&P says.

In addition, reinsurers increased their minimum premium requirements for top layers substantially in response to their rising cost of capital, the rating agency says. The result was that for property reinsurance, pricing power shifted from reinsurance buyers to the reinsurers.

The picture was a bit different for casualty reinsurance, where the balance of pricing power remained with ceding companies due to plentiful capacity and reinsurers' increased appetite for the segment, S&P says. Higher investment income due to rising bond yields will offset moderating price increases in the United States somewhat for reinsurers, according to the rating agency.

"We believe the significant price increases, along with these portfolio underwriting actions, will boost reinsurers' underwriting performance in 2023," the S&P report says. "In addition, the high interest rates should propel investment income, offsetting the moderating rate increases in some of the US long-tail casualty lines."

S&P also says it expects upward reinsurance pricing momentum to continue for upcoming 2023 renewals. Property reinsurance capacity remains constrained, S&P says, and competitive pressure that had been provided by the alternative capital market has lessened somewhat as that market is dislocated following several catastrophe losses and the resulting trapped capital and loss fatigue.

"Investors, especially in collateralized reinsurance and sidecars, have suffered significant losses over the past few years and are questioning the sponsors' underwriting and modeling capabilities and becoming more stringent in their selection of who to partner with," the S&P report says. "As a result, some investors have reduced their exposure to these catastrophe risk vehicles or completely exited this market. Others have decided to switch to catastrophe bonds, which provide more transparency, liquidity, and attractive returns."

While reinsurers continue to face a number of hurdles and uncertainties, January rate increases and underwriting actions seen at renewals are positive signs that the industry might be turning the corner, S&P says.