Reinsurance Price Increases More Modest Than Expected at January Renewals

Analysis of January 1 reinsurance renewals shows that, in general, buyers did not face price increases or changes to terms and conditions as extreme as many had anticipated.

Willis Re found that reinsurers "largely arrested the persistent downward trends which characterized recent years" at January 1 renewals. Still, the intermediary reported, "For buyers, terms and conditions have overall been less onerous than initially feared, again revealing the efficient working of the global reinsurance market."

This came despite the impact of the COVID-19 pandemic on both working conditions and exposures, Willis Re said.

Investment market improvements, retained earnings, and newly raised capital helped global reinsurance capital levels to recover rapidly during 2020, ending the year 3 percent above their year-end 2019 levels, according to Willis Re.

Guy Carpenter offered similar findings, noting that price increases at January 1 reinsurance renewals "were moderated compared to initial expectations by abundant capital levels and an increased willingness on the part of reinsurers to deploy capacity in several sectors."

According to Guy Carpenter, January 1 reinsurance renewals were marked by several characteristics, as follows.

• An earlier start to the renewals
• Slower and more complicated quoting process
• Rigorous contract reviews
• Later-than-average signing process
• Significant pricing pressure for loss-impacted programs
• Pricing for loss-free programs generally in line with expectations
• Renewal experience varied depending on underlying portfolio exposures and experience

The quoting and firm order process was more complex at January 1 renewals than in recent years, Guy Carpenter found, particularly for stressed geographies and lines of business. "In addition to rate and structure considerations, contract wording discussions were a significant component of negotiations," Guy Carpenter reported. "Communicable disease and cyber exclusions were two of the more prevalent topics."

Willis Re noted that buyers seeking reinsurance for short-tail portfolios with poor loss records did find January 1 renewals demanding, with reinsurers reluctant to support aggregate and working layer covers though their appetite for higher, loss-free layers was greater.

Buyers seeking casualty reinsurance found negotiations of pro rata treaties more friendly, Willis Re said, as a result of underlying rates increasing "consistently and significantly." Some buyers balanced demands for reductions in ceding commission by opting to increase net retentions of risks they now believe are adequately priced, Willis Re reported.

Meanwhile, incumbent reinsurers faced competition from reinsurers armed with fresh capital, Willis Re said, though the ongoing and worsening low-interest-rate environment and social inflation affected pricing on all excess of loss long-tail reinsurance lines.

While property retrocession capacity remained limited, it wasn't constrained to the extent many anticipated, Willis Re said, particularly as some insurance-linked securities funds increased their assets under management, traditional reinsurers offered new or additional limit, and some buyers sought to purchase less coverage. Aggregate capacity was more constrained than occurrence coverage, however, which led some buyers to respond with increased catastrophe bond issuance, according to Willis Re.

Though emerging COVID-19 losses triggered technical discussions of primary policy coverage and reinsurance treaty wordings, both remain in the early stages of deliberation, Willis Re said. Consequently, most programs renewed without conclusion of potential COVID-19 losses, leaving time for more measured discussions and subsequent adjustments later. Meanwhile, reinsurers have been generally unwilling to accept ongoing contagious disease exposures, the intermediary reported.

Guy Carpenter found that property reinsurance pricing generally settled at the lower end of expected increases at January 1 renewals. "Where placements were loss impacted, particularly in cases where retentions were perceived to be too low, reinsurers held firmer on pricing or structure adjustments," Guy Carpenter said.

Ample property reinsurance capacity was available from incumbent reinsurers and new market entrants at January 1 renewals, Guy Carpenter said, while limit demand was generally stable with a few pockets of increases. On non-loss-impacted programs, risk-adjusted price increases ranged from the mid-single digits to the low teens in the United States, while in Europe, the Middle East, and Africa and the Asia-Pacific region, average risk adjusted price increases were in the low single digits.

Guy Carpenter also found that currently the property reinsurance loss implications of COVID-19 were not as disruptive as feared earlier in 2020.

The intermediary noted that while some observers expected the impacts of hardening markets to be significant on January 1 property retrocession renewals, in fact, rate movement on non-loss-impacted programs weren't as great as many anticipated and continued to moderate closer to January 1. "Additional capacity in the retrocession market, lower limits bought by some global companies, and increased activity in the catastrophe bond market all helped to moderate some of the upward pressures in this section of the market," Guy Carpenter said.

"Communicable disease exclusion wording was a key discussion area on every property renewal worldwide," according to Guy Carpenter. "Due to the potential global nature of this type of loss and the possible broader financial market correlation, capital providers and investors stipulated exclusions in most cases."

On the casualty front, Guy Carpenter found that renewals varied widely, depending on individual experiences, including covered lines and industry classes written. "Every placement experienced some degree of continued reinsurance underwriting rigor around stress factors broadly encompassed by social inflation, the low-interest-rate environment, and communicable disease," Guy Carpenter said.

Guy Carpenter found that, in general, there was ample reinsurance capacity available across most casualty lines at January 1 renewals, though for some programs with more challenging loss experience or industry classes there was additional pressure on other treaty terms and conditions and pricing.

Contract language requirements in casualty placements around pandemic and communicable disease varied by line of business with workers compensation, long-term care, casualty clash, and casualty programs with particular exposures requiring the most discussion, Guy Carpenter said.