Reinsurance renewals at 1/1: Continued (slow) improvement

Lara Mowery, Global Head of Distribution, briefs Reactions on 1/1 renewals and a look ahead to upcoming trends. The following was originally published in Reactions.

When one of the most positive things that P&C industry executives could point to when discussing the 1/1 reinsurance renewals was the “orderly” nature of the transactions, it says a bit about how the hopedfor increase in rates proved a disappointment for some players. 

That’s not to say that the reinsurance market did not continue its hardening at the January 2021 renewals: COVID-19 related claims, notable natural catastrophe losses and pressure on liability lines fueled by social inflation and low interest rates all helped spur price increases across the board. 

“Rates were still positive geographically and by line of business, while muted to some degree from what was anticipated,” says Chris Schaper, CEO of AIG Re. 

“The market was disciplined, but more flexible to clientspecific requirements than had been flagged in various virtual conferences prior to 1/1,” says James Vickers, Chair of Willis Re International. 

Global risk-adjusted propertycatastrophe reinsurance rateson- line rose by an average of 6% at 1/1, reflecting the biggest year-over-year increase in over a decade, according to research by Howden. 

Rates showed firming in every business line in every geography, with hardening exhibited significantly in U.S. Property and Casualty lines – where the gains were the highest, globally speaking. Moderate price improvements were also seen in loss-free European markets, said Fitch Ratings, which noted that while natural catastrophes did not play a major role in Europe, the pandemic did affect some property lines of business such as contingency/ event cancellation and business interruption. 

Casualty lines continued to see higher price increases than property lines, partly due to the fact that the former remain besieged by the effects of low margins and social inflation and are more exposed to the impact of low yields (as the reserves have a longer duration), according to Jefferies research and Willis Towers Watson data. 

Specialty lines saw the highest boost in prices, especially for loss-affected accounts. Some aerospace contracts for clients that suffered losses saw price hikes of up to 250%, while some accident policies and trade credit contract prices for loss-affected clients rose 50%. 

Mike Van Slooten, Head of Business Intelligence for Aon’s Reinsurance Solutions, says the changes in terms and conditions “will likely prove to be more significant than the headline changes in price. 

“The main thing that struck me was the orderly nature of the renewals, despite the significant financial and operational challenges posed by COVID-19,” he adds. “The actual outcomes were pretty much as I expected.” 

Lara Mowery, Global Head of Distribution for Guy Carpenter, tells Reactions that contractwording discussions were a key component of negotiations, with communicable disease and cyber exclusions two of the more prevalent topics. “Communicable disease exclusion wording was a key discussion area on every property renewal worldwide,” she adds. Agreeing upon language for pandemic-related exclusions in property and liability contracts in particular proved a key element of client discussions, and reinsurers successfully excluded contagious disease coverage from most contingency/event cancellation and business interruption policies renewed from 1 January. 

The renewal process commenced earlier than January renewals have in the past, says Mowery, who adds that the quoting process “was more complicated and progressed much more slowly.” Additionally, the signing process occurred later than average, she notes. 

There was also a great deal of uncertainty going into 1 January renewals regarding how the unknown quantum of COVID-19 losses would affect placements, Mowery points out. While this did not prove to be a major disruptor, she adds, it will be an area to watch in 2021. 

Client expectations

Buyer demand, meanwhile, overall was stable to slightly up, says Vickers. “But with improving original terms and conditions on some previously challenged portfolios, buyers started to indicate that some have now reached price adequacy, leading to increased retentions.” 

Mowery says that this time around, buyers carefully evaluated risk-transfer strategies, finding the right balance between the appeal of greater protection in uncertain economic conditions and the terms offered: “With primary pricing increasing significantly in certain lines and geographies, this added to the structure evaluations, particularly for those considering quota share versus excess-of-loss solutions.” 

Schaper says he found that clients wanted more quotes. “They weren’t getting as much from a quote point of view as they desired,” he explains. “Clients with loss activity had fewer quotes come to them. They were looking for markets to step up to the plate, and we sought to deliver on our end.” 

“Demand has generally held up well, as buyers react to volatility and uncertainty,” says Van Slooten. “Cedants again experienced differentiated outcomes based on their portfolio results, data quality and commitment to managing reinsurer relationships.” 

“The degree of market responsiveness was still largely an unknown going into December, but ultimately reinsurers were very active in working to find mutually agreeable solutions for clients,” adds Mowery. “While the renewals were late, reinsurers demonstrated a greater willingness to deploy capital than at mid-year 2020. Conditions improved in the retro market in particular throughout the end of the month.” 

Despite early expectations of a capacity shortfall, Schaper says that turned out to be anything but the case: both traditional and alternative reinsurance capital remained largely unchanged in 2020, in spite of the losses wrought by the pandemic and an expensive year for natural catastrophes. Fitch notes that capital injections of more than $20bn and a recovery in the financial markets helped to stabilize reinsurance capacity at the level seen in early 2020. 

When it comes to capacity, Schaper adds, “it’s an incumbent’s market. The new money that entered the market in 2002 was absolutely necessary. The money that came into the market in 2006 had a seat at the table. Now, for the new capital coming in to get a seat at the table … it’s a crowded table.” 

Instances in which capacity has been seen as tighter are a result of checked appetite rather than capital destruction, says Howden. “Despite sizeable price increases, a number of major capacity providers have scaled back or withdrawn from underperforming lines of business,” the broker says in its “Hard Times” report on 1/1 renewals. “Market sentiment has been transformed by fear of ‘(un)known unknowns’ in a highly uncertain and volatile environment.” 

Van Slooten expects some additional new capital to enter the market in the early part of 2021. “The main threats to the overall level of capitalization in the industry continue to be very substantial catastrophe losses, extensive adverse casualty reserve development and bouts of extreme volatility in the capital markets,” he notes. A prolonged period of uncertainty will likely continue to drive the demand for reinsurance, says Mowery.

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“The reinsurance market is positioned to supply capacity at adequate rates to this demand with current capital levels,” she adds. “The continued hardening of the primary market will be another key indicator to watch as necessary support for the heightened focus on risk appetite and tolerance in an uncertain and changing environment.” 

“Some fresh capital has come into the market but has acted in a disciplined fashion to date,” adds Vickers. “In the current low-interest-rate environment, more capital might be attracted, but the key is how the managers of any new capital seek to deploy it.” 

The next round 

Looking ahead, Vickers says “the 1/1 renewals provide a reassuring signal for the midyear renewals that capacity is abundant, pricing-movement demands are reasonable and most importantly logical as reinsurers remain focused on differentiating by client and class.” 

The market pressures that were in play at 1 January are expected to continue throughout 2021, says Van Slooten: “The effects may be more marked at the mid-year renewals, given that more of this business has been exposed to losses in recent years.” 

Mowery points out that dedicated reinsurance capital increased slightly year on year based on estimates by Guy Carpenter and A.M. Best, and reinsurers’ responsiveness and willingness to deploy capital were more apparent at 1 January as opposed to at mid-year 2020 when reinsurers were more cautious. Additionally, she says, “new entrants into the market and capital raises by established reinsurers coupled with financial market recovery contributed to improving conditions. This was further assisted by COVID-19 loss development levels at the lower end of predicted ranges. 

“These conditions are positive influences for upcoming 2021 renewals; however, capacity remained more constrained in many areas including loss-impacted programs and aggregate covers,” she adds. “In addition, factors such as social inflation, climate change and COVID-19 loss development will continue to be areas of scrutiny. Renewal outcomes have been increasingly attuned to individual placement dynamics, a trend that is likely to continue in 2021.”



A welcome tightening of terms and conditions is mixed with price increases that could have been better.

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