Reinsurers were mostly disciplined and discerning at 1 January 2021 reinsurance renewals, portending similar discipline in the near-term, according to UK headquartered international insurance broker Howden.
In a report titled “Hard Times—How events in 2020 have delivered a sweeping shock to risk transfer markets”, Howden says that lower investment yields, higher loss cost trends, another above-average loss year, concerns over climate change and general risk aversion have coalesced to bring about some of the sharpest price changes in recent memory. Rates accelerated across most commercial lines in 2020, despite businesses facing significant, even existential, financial pressures due to COVID-19. Balance sheets remain generally strong, with the sector continuing to attract substantial new investment capital.

Mr David Flandro, managing director of HX Analytics which is a division of Howden, said, “A multitude of factors informed this year’s (re)insurance renewals. Despite the asset shock that occurred immediately post-lockdown and full-year underwriting losses of $100bn or more, capitalisation has proved resilient. Incumbents and new players raised close to $20bn of capital in 2020 for all purposes, with more to come this year. This is therefore not a universally dislocated market; differentiated risk management strategies and advice can still unlock access to capacity, even if the landscape has undeniably become more challenging.”

Findings

The report’s key findings on reinsurance renewals include:



Howden’s Global Risk-Adjusted Property-Catastrophe Rate-on-Line Index rose by 6% at 1 January 2021. This was higher than the flat outcome of 2020, and the biggest year-over-year increase in over a decade. COVID-19 loss experience, along with yet another hyperactive natural catastrophe year, were key inflating drivers.


Programmes in North America led the charge at 1 January 2021, with an average rate-on-line increase of 8.5%. Pricing pressure was more subdued outside the US.


A significant turning point was reached in Europe: the almost habitual experience of flat-to-down renewals relented in 2021, with rate rises in the low-to-mid-single digit range.


Another year of constrained capacity in the retrocession market saw Howden’s Risk-Adjusted Nonmarine Retrocession Catastrophe Rate-on-Line Index rise by 13%. Four consecutive years of price increases have seen the cost of retrocession protection return to levels last recorded in 2012/13.


Casualty reinsurance rates-on-line, including adjustments for exposure changes and ceding commissions, rose by 6% on average at 1 January 2021.


Rising rates on underlying business, especially in the US, mitigated pressure on ceding commissions somewhat, although outcomes varied depending on book performance. Reinsurers were resolute in pursuing higher pricing for excess-of-loss programmes, although there was again some degree of differentiation to account for portfolio characteristics and profitability.

Mr Jose Manuel Gonzalez, CEO, Howden Broking Group said, “Whilst the pricing environment may be supportive for carriers in 2021, this should not translate into a degree of risk aversion where underwriters accept rate but shy away from new risks or new business. The global risk landscape is changing like never before.

“Carriers and brokers have always served clients best by learning from shock events and 2020 is surely a year rich in its lessons. There is much to draw from: COVID-19 has brought the growing ‘intangibility’ of risk into focus, a trend that is only going to accelerate as new technologies continue to redefine risk characteristics. Irrespective of what happens to the market cycle in 2021, the (re)insurance market must seize the opportunity and focus on doing what it has done so well several times over; innovate and develop creative solutions for the changing needs of our clients.”

Looking ahead

The report also highlights the need to challenge the status quo and focus on product innovation and better broking solutions to meet the changing needs of clients.

Looking ahead to 2021, hopes rest firmly on a successful vaccine rollout to limit the already considerable economic damage. The resumption of economic growth must be facilitated and supported through better risk transfer solutions.

Factors that will affect the market include:



COVID losses: The difference in COVID-19 loss projections is considerable, ranging from something approaching the largest loss ever for the private (re)insurance market to an event more akin to a moderate hurricane loss. Which scenario most accurately depicts reality will become clearer this year. Whilst capacity and risk appetite will be shaped by the answer, (re)insurers are strongly positioned to trade through and, whatever the outcome, will benefit as COVID-19 uncertainty recedes.


Market cycle: The duration of market discipline, and whether buyers can expect a prolonged period of price rises will be among the most contested topics of 2021. Whilst the catalysts for market hardening appear structural rather than cyclical, the insurance sector overall confronts these challenges from a position of strength.

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