The 1.1 renewals: forget the dog’s tail, it’s the cat’s whiskers this year

The age-old analogy when it comes to pricing questions for the crucial 1.1 renewals is the extent to which the reinsurance tail is wagging the primary dog, or even whether the retrocessional tail is wagging the reinsurance dog, writes Marcus Alcock.

Well, dogs are so last year. For this year is very much the year of the cat… and this fact will help to sustain pricing well into next year.

For the fact remains that capacity in the market remains ample, and from chatting to folks in the market what’s driving reinsurance 1.1 renewals discussions at the moment is very much the level of catastrophe activity, which has seen balance sheets bruised once again. Yes, tough on those accounts which have by luck or judgement remained loss-free, but least they will get discounted rate increases so they can’t complain too much.

So what level of losses are we talking about? Well, this week the  Swiss Re Institute issued its preliminary sigma estimates which found extreme weather events in 2021, including a deep winter freeze, floods, severe thunderstorms, heatwaves and a major hurricane, resulted in annual insured losses from natural catastrophes estimated at US$105 billion, the fourth highest since 1970. Ouch!

While Hurricane Ida was the costliest natural disaster in 2021, winter storm Uri and other secondary peril events caused more than half of total losses as wealth accumulation and climate change effects in disaster-prone areas drive claims. Man-made disasters triggered another $7 billion of insured losses, resulting in estimated global insured losses of $112 billion in 2021.

According to  Swiss Re, the $112 billion figure continues the trend of an annual 5–6% rise in losses seen in recent decades – and this fact is, we think, hugely significant when it comes to pricing dynamics not only for the forthcoming 1.1 renewals, but also for rating more generally over the course of 2022.

We think that, despite the abundant capacity in the market, and despite the inevitable pressure that will be applied by pesky start-ups and fly-by-night merchants who are willing to write the risk no matter what the cost (don’t pretend you’re not out there), for most of the market, price rises will actually continue next year.

For the key dynamic affecting pricing at the moment is very much loss activity. Another record nat cat year, yes, and one in which, as if we didn’t know by now, secondary perils are hugely significant – and actually quite nasty when it comes to increasing claims costs.

But there also some really nasty settlements coming through from the US in relation to historic abuse claims, and the concern that social inflation will be a nasty problem for the casualty market next year as US litigation revs up after a COVID-led lull, and younger juries will be keen to dish out punishing compensation awards against those nasty corporates. And don’t forget the lingering uncertainty over COVID-related event cancellation, business interruption and D&O claims, many of which have yet to be fully absorbed by the market.

Of course, no-one is pretending that losses will remain the dominant factor for pricing beyond 2022. Unless next year delivers something extraordinary in terms of claims, the competitive pressure will be too much and the market, egged on by brokers, will start to soften again and the Jan 2023 renewals will see the start of softening. But underwriters will, we suggest, have one more year to make the most of (vaguely adequate?) rating before the sun goes in again.

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