According to Joe Monaghan, Global Growth Leader Reinsurance Solutions, Aon, the January 2023 renewals were the most challenging in a generation as the reinsurance market underwent a fundamental shift in pricing and risk appetite, marking a moment of truth for the industry and a new reality for buyers.
Monaghan states that this was most notably the case for property catastrophe risk. He added, “Following six years of underwhelming returns and above-average catastrophe losses (capped by Hurricane Ian in late September of 2022), the market had started to experience firming in 2022.
“Different from prior market cycles, there were a number of exogenous factors including forty-year record inflation, unrealized investment losses driven by a precipitous rise in interest rates, dramatic foreign exchange moves, climate change driving evolving investor sentiment, and a war in Europe, the reinsurance market took action to put itself back on an even keel.”
Further, Monaghan suggests that pricing for US property catastrophe and global property retrocessional business hit multi-decade highs at January 1.
He notes that reinsurers moved away from frequency layers and “sought to redraw the scope of property catastrophe protection with narrower coverage definitions and more excluded perils.”
These changes posed many new challenges for insurers, says Monaghan, especially those that have not ceded losses and were not in peak zones, concerned that reinsurers were treating all buyers in the same way.
He added, “Hard markets are fundamentally characterized by the inability to purchase desired levels of capacity. Successfully navigating such a market requires preparation and high-quality data.”
“At January 1, insurers that went to the market early with a well-informed and proactive strategy were best positioned to secure capacity. Portfolio differentiation and client advocacy were also critical in a market where challenging reinsurers’ broad assumptions can make a big difference to client outcomes.”
“Clients that were able to leverage strong relationships and clearly demonstrate how they have mitigated the impact of inflation on exposures were able to access more favourable terms and capacity.”
Monaghan continued, “Meaningful new capital did not enter the market in advance of January 1. In late December, we saw encouraging signs that reinsurers were looking to take advantage of improved conditions, although the capacity entering the market at January 1 fell well short of withdrawals earlier in the year.
“New capital may flow into the reinsurance market in the first quarter attracted by the certainty of returns and improved underwriting conditions that were established at the renewal.
Capital entering the reinsurance market in 2023 will be rewarded by strong demand and attractive terms. We believe many clients will reevaluate their retained volatility in the first quarter and several may consider additional reinsurance purchases.”
This “re-setting” of the reinsurance market at January 1 has important implications for insurers’ capital management and balance sheet protection, says Monaghan.
As the reinsurance market is heading towards sustainability, traditional reinsurance is returning to its core role of protecting capital, which may increase earnings volatility for insurers.
Meanwhile, the January 2023 renewal season was also rocked by an array of macroeconomic and geopolitical events, many of which exist outside of the loss experience that typically drives changes in reinsurance market terms and conditions.
Monaghan observes that many of these variables remain, and will be part of the industry’s landscape for the foreseeable future.
He concluded, “We are hopeful that the turbulence of the January renewals is a meaningful step forward to a stable structural and pricing environment.
“While this was an extremely challenging and, in many instances, stressful renewal, the marketplace functioned. Though deals were negotiated and finalized before year-end, there is collective work to be done.
“Aon is working hard to rebuild investor confidence, create additional capacity and ensure that reinsurers have access to the highest quality data and analysis to enable them to maximize their support of clients.”