Reinsurance renewals face ‘most dislocated’ market in decades: Howden
The reinsurance market heads into the 1.1 2023 renewals having finally crossed a tipping point where a prior overabundance of capital has fallen hard and fast to a dangerously revamped loss landscape and rising cost of capital, Howden analysts have said.
“The three Cs of climate, conflict and capital are coalescing to create a tipping point for the reinsurance market,” analysts wrote. The mix of supply and demand factors, both new and old, “coalesce to create some of the most dislocated market conditions for the best part of two decades.”
The supply side of the price equation may be the bigger and more volatile mover, Howden suggests. Dedicated capital at year-end 2022 will decline for the first time since the global financial crisis, Howden claims. Equity and bond market losses to date in 2022 wiped out palpable 11% already in H1.
“The environment of excess capital which persisted for much of the last decade has been replaced by a capacity crunch and increased demand.”
Those very conditions rendered mid-year renewals showing the “biggest collective reinsurance rate increase in more than 15 years,” analysts wrote. Florida went off the charts.
Reinsurers started 2022 playing catch up even before the cost of capital broke trend. The five years of heavy cat losses since 2017 “had a much more muted pricing impact” than prior nat cat peaks, despite what Howden calls a “low historical base.”
Pressures were already “particularly acute” in the property-catastrophe space, where rising inflation, along with a succession of expensive secondary peril losses, partially attributable to climate change, had “strengthened reinsurers’ resolve to demand higher returns.” A slow-down on alternative capital had further tightened the picture.
In the Howden view, the relative pricing laziness versus prior nat cat peaks resulted in large part from cheap money. Fiscal stimulus and low interest rates put reinsurer eyes on market shared over margin and raised a generation of yield-seekers on capital markets to provide an alternative capital backstop.
“The rapidly deteriorating risk landscape did little to move the reinsurance market initially,” Howden said. “For a time, favourable supply factors prevailed over a build-up of pressures” on loss accounts including 2017 nat cats, the rise of “unusually expensive” secondary perils, climate change and Covid-19.
No more. Price expectations have “shifted in line with structural changes to the loss environment.”
A calmer-than-normal Atlantic season, should it hold beyond the season peak, won’t have a chance to break that resolve. “2023’s reinsurance renewal cycle is likely to see further pricing pressures, irrespective of whether the wind blows this year or not.”
Did you get value from this story? Sign up to our free daily newsletters and get stories like this sent straight to your inbox.
