Reinsurance rate rises moderate in ‘orderly’ renewal

Jan. 1 reinsurance renewals went much more smoothly and featured far fewer dramatic rate increases than last year, even as concerns rose about casualty loss developments and rising loss cost trends.

A report last week from Gallagher Re, a unit of Arthur J. Gallagher & Co., showed that loss-free property reinsurance accounts renewed flat to up 10%, while loss-hit accounts ranged from 7% to 50% increases, and catastrophe loss-hit accounts renewed up 10% to up 50%.

Howden Broking Group Ltd. reported last week that global property catastrophe reinsurance rates rose 3% on a risk-adjusted basis and a report from Aon PLC showed casualty  excess of loss business on average renewed with mid-single-digit risk-adjusted rate increases.

Experts generally agreed the market was much more “orderly” this year than last, with limits available and most programs placed on time.

“There was ample capacity,” but there was still “underwriting rigor,” said David Priebe, New York-based chairman of Guy Carpenter & Co. LLC.

Property reinsurance market negotiations were far less contentious than last year because parties had the past year to work on aligning contract language and coverage parameters, he said.

In its most recent Global Property Catastrophe Rate on Line Index, released Monday, Guy Carpenter said the index increased by an estimated 5.4% year-on-year, with the U.S. index increasing by 5.25% and Europe higher by 7.6%.

Casualty

There was, however, “a lot of talk and discussion around casualty because of the recognition that back years, predominantly 2015 to 2019, were continuing to develop at a rate greater than prior expectations,” Mr. Priebe said.

While casualty limits remained generally in ample supply, reinsurers focused on primary insurers’ remediation of casualty portfolios, Mr. Priebe said.

Concerns also persist around rising judgments and so-called social inflation, or higher verdicts and settlements, which Mr. Priebe called “a critical area that we and the industry are going to be closely monitoring. There’s a real concern around some of the escalating verdicts and judgments that are starting to impact the industry.”

“Nuclear verdicts and social inflation are combining with prior-year adverse development to push down ceding commissions while adverse development and decreased primary rates on professional lines have had a similar effect on those placements,” said Chris Buse, Wilton, Connecticut-based CEO, North American reinsurance, at Axa XL, a unit of Axa SA.

“There is a lot of focus on reserving on the casualty side,” said Mike Van Slooten, head of business intelligence for Aon PLC’s reinsurance solutions division in London. “There is some adverse development which the industry is watching very closely. There’s still quite a lot of capacity out there for casualty reinsurance, but I think there’s also a fair degree of caution as well.”

Mr. Van Slooten also said cedents’ management of their casualty portfolios would likely be a differentiating factor with reinsurers.

“If you’re looking for casualty coverage and your portfolio has behaved itself, you’ve done what you said you would do, and there hasn’t been any nasty surprises, you won’t have too many difficulties. If you’ve got a portfolio where nasty surprises are emerging, it’s going be a different conversation,” he said.

“On the casualty side, we still see headwinds but it’s not a broad brush,” said Jill Beggs, Warren, New Jersey-based head of North America reinsurance at Everest Group Ltd.

“We spent a lot of time with our clients digging into their portfolios to understand the methodology they were using, any assumptions they were using. There have been significant changes and improvements to underlying portfolios,” she said.

Past years, including 2014 through 2019, are looking “really ugly,” and those primary insurers that wrote more casualty business during the period could be more challenged in the reinsurance markets, said James Vickers, London-based chairman international, reinsurance, at Gallagher Re.

Cedents’ remediation of their casualty portfolios “hugely matters” when trying to differentiate themselves to reinsurers, Mr. Vickers said.

“We’re seeing development even after the 2019 year in the more recent years, where it’s in some portfolios, but it really does depend on the makeup of the portfolio,” Ms. Beggs said.

Timeline

The timeline of renewals was also smoother this year as counterparties, including brokers, reinsurers and cedents, benefited from early initial contacts and the lack of any large events late in the process.

“Reinsurers engaged relatively early and were quite clear about what they wanted to achieve,” Mr. Vickers said.

He added that while the frequency of natural catastrophe losses, such as severe convective storms, may have risen in 2023, there was no single large loss like 2022’s Hurricane Ian, which sent a chill through the property reinsurance market toward the end of the hurricane season.

Property cedents and reinsurers also benefitted from alternative capital raised through the insurance-linked securities sector, where the catastrophe bond market set a record with $15.4 billion of new issuance, and there was an outstanding catastrophe bond market balance at year-end 2023 of more than $42 billion, an all-time high, according to a report from Aon.

The ILS market “provides that additional valuable layer of capacity and capital to the industry,” in addition to multiyear capacity, Mr. Priebe said. “So, it adds stability in the marketplace.”

Catastrophe bonds often provide valuable swing capacity for the retrocessional reinsurance market. Last year, the market was roiled by the late appearance of Hurricane Ian and fears of trapped capital and loss creep.

“That was something that definitely was different this year versus last year, retro placements were completed earlier,” which helped facilitate the “orderly” renewal process, Ms. Beggs said. “Without that certainty of what the retro capacity looks like, it’s hard to really move forward.”