The supply / demand imbalance in the property catastrophe reinsurance market seen at January 1st showed signs of easing at the April 1st renewals, leading broker Aon to be optimistic that the market is “now on a more stable footing following a turbulent 1/1”.
Aon has released its April Reinsurance Market Dynamics report, which discusses the April 1st renewals which has a focus on the Asia Pacific region, notably Japan, which is home to some of the world’s largest catastrophe reinsurance placements.
“The challenging renewal represented a material hardening for property catastrophe reinsurance programs in Asia Pacific, a market that has historically been more insulated from the global reinsurance cycle. However, the renewal was orderly, and programs were placed as per expectations,” notes the global broker.
As at 1/1, the re-pricing of catastrophe risks persisted at the April renewals, although outcomes were moderated by local market dynamics, as well as reinsurers adopting a more measured approach.
According to Aon, sellers of protection entered the April renewal with clarity around their cat risk appetite, which once again included very limited appetite for aggregate cat cover. Informed buyers anticipated the retention and price adjustments needed to achieve desired placement outcomes.
The APAC region experienced meaningful rate increases and adjustments to retentions, so while property cat capacity was broadly adequate at April 1st, it came at a price.
“The catastrophe market in Japan, in particular, benefited from robust pricing levels established in the wake of large quake and windstorm losses,” says Aon.
Although the outcome of the April renewals provides grounds for optimism, Aon notes that only a small amount of U.S. property cat programs were up for renewal, with APAC renewals reflecting existing cat pricing levels and lower inflation.
Market conditions for the rest of 2023 and beyond will depend on future inflation, cat losses, and financial market stability, says Aon.
“Geopolitical and macro-economic uncertainty remain key considerations. To date, the difficulties seen in the banking sector have not materially impacted underwriting appetites, or investor interest in the reinsurance sector. These recent developments do contribute to macro-economic uncertainty in the near term as the potential impact of reduced available credit from banks in the wake of these events remains unclear.
“Demand for reinsurance was stable at April 1, reflecting relatively low levels of inflation in renewing APAC markets. High inflation in the U.S. and Europe drove increased demand at the January 1 renewals, although insurers held off buying increased limit in the face of challenging market conditions. Demand pressures have eased, although financial market volatility could result in ‘higher for longer’ inflation, which could place retentions and limits under renewed pressure at future renewals,” says Aon.
Looking ahead to the mid-year renewals, Aon anticipates a challenging but manageable renewal, with capacity available but again at a price.
The insurance and reinsurance broker expects that, all things being constant, the market should stabilise further, although inflation and catastrophe losses during 2023 will be key.
“The first quarter has already seen devastating earthquakes in Turkey and Syria, floods in New Zealand and deadly tornadoes in the U.S. state of Mississippi. However, for a prolonged sustainable market, reinsurers and investors will want to see improvement in returns before committing more meaningful capacity,” says Aon.