Reinsurance Market Described as Stressed but Sound at April 1 Renewals

The global reinsurance market demonstrated discipline at April 1 renewals similar to that seen in January, though with a more intense focus by reinsurers on pricing and contract improvements across all territories and business lines, according to Gallagher Re.

The reinsurance market remains under stress but sound, however, according to the recently released Gallagher Re 1st View: Undimmed Resolve.

The intermediary notes that reinsurance market capital remains constrained with limited signs of new capacity entering the market and existing reinsurers facing mark-to-market investment losses.

"The reinsurance market remains stressed as reinsurers seek to achieve reasonable returns on their capital while nursing large mark-to-market investment losses," James Kent, Global CEO of Gallagher Re, wrote in an introduction to the April 3, 2023, report. "Headline capital in the global insurance industry has reduced as a result of investment losses but provided reinsurers do not have to realize these losses through the early sale of underlying assets the underlying economics remain sound providing ceding companies with secure capacity."

Gallagher Re says the reinsurance supply/demand dynamic was "finely balanced" at April 1 renewals, though overall buyers managed to secure sufficient capacity.

While January renewals saw some smaller territories receiving more favorable treatment from reinsurers than major mature markets, that differentiation had largely vanished by April's renewals, Mr. Kent wrote.

"Despite this more uniform and global approach, a client-led underwriting process remained evident," Mr. Kent wrote. "Clients and markets who had seen significant price increases and tightening of reinsurance conditions in recent years consequently experienced more measured increases."

Some smaller markets, where terms and conditions had been largely unchanged for a number of years, however, faced intense pressure from reinsurers looking to correct soft market conditions in a single renewal, according to Mr. Kent.

"For Japanese buyers, both client and reinsurers expectations were better aligned than at January 1, which led to a more orderly renewal process," Mr. Kent wrote. "This was aided by both the long-term nature of reinsurer relationships in the Japan market as well as the considerable improvements in primary underwriting that Japanese insurers have achieved in recent years."

But other smaller reinsurance markets saw examples of reinsurers enforcing major structural changes at the last minute and quotes being delayed to minimize negotiating time, the report says. "The impact of these structural changes has been both unexpected and profound on the financials of some insurance companies and is leading to an immediate impact on their original underwriting with all the challenges that this entails, causing significant strain in some of the client and reinsurer relationships," Mr. Kent wrote.

In the US property reinsurance market, the market was more orderly at April 1 renewals than at January 1, according to the report, with great clarity around available capacity and terms and conditions.

On US catastrophe reinsurance programs, the focus remained on secondary perils, the Gallagher Re report says, with some reinsurers looking to restrict coverage to the peak perils of earthquake and hurricane.

Reinsurers continued to reserve US nationwide multiperil capacity for core clients and renewal lines, the report says, and were consequently more likely to review new opportunities on a region- or peril-specific basis.

As at January 1 renewals, the casualty treaty market remained "calm and logical," Gallagher Re says, though concerns that continue to grow over "nuclear" jury verdicts in the United States are having an impact on US casualty placements, including some treaties with incidental US exposures.

Regarding April casualty renewals, Mr. Kent suggested that similar to January 1 renewals, April renewals of long-tail classes of reinsurance were less contentious.

"The notable exception has been US public [directors and officers insurance] where pressure on ceding commissions remains following decreases of up to 2 points at January 1," Mr. Kent wrote. He notes that reinsurers cited continued prior-year adverse development and negative rate in the underlying market as the drivers of these shifts, while reinsurance buyers argued that portfolio dynamics are less volatile and renewal rate change is misleading given the impact of initial public offerings, special purpose acquisition companies (SPACs), and de-SPAC business in recent years.

While the reinsurance market's capital supply remains constrained, insurance-linked securities (ILS) issuance is picking up, according to Mr. Kent. ILS remain expensive compared to previous years, and are at higher prices than traditional indemnity pricing, the report says.

While sufficient reinsurance capacity was available at April 1 renewals, Mr. Kent notes that because Japan represents the largest capacity requirement at April renewals at a significantly lower demand than peak US catastrophe exposure, this April's renewals can't be seen as a true test of the reinsurance market's supply/demand dynamics.

"The hopes of some buyers that new capacity might enter the market at this renewal—and some signs of amelioration in hardening terms and conditions would emerge—remain unfulfilled," Mr. Kent wrote. "This is pushing primary companies back to reexamine their original underwriting strategies, which in the current strained economic environment is extremely demanding to address with original policyholders."