Reinsurance News

Howden warns of ‘tipping point’ for reinsurance market ahead of 1/1

8th September 2022 - Author: Luke Gallin

Climate, conflict, and capital are uniting to create a “tipping point” for the global reinsurance market ahead of the key, January 1st, 2023, reinsurance renewals, according to re/insurance broker Howden.

howden-group-logoAs the market prepares to meet once again in Monte Carlo after a COVID-19 induced hiatus, Howden has released its latest reinsurance market report, A Tipping Point.

The report finds that the three Cs of climate, conflict, and capital are “coalescing to create a tipping point for the reinsurance market.”

After a relatively benign period on the catastrophe front, headwinds in the form of land-falling hurricanes started to have an impact on firms and the market landscape in 2017, which was followed by rising secondary peril losses – an ongoing trend – a global pandemic and accompanying financial market volatility, and more recently Russia’s invasion of Ukraine.

Howden notes that while reinsurers initially stood firm in the face of headwinds, persistent cat loss frequency, coupled with “major macroeconomic and geopolitical realignments” in 2022 have ultimately exacerbated the challenges and altered assumptions around yield, capital, and loss costs.

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According to the broker, risks are escalating and as the world endures one crisis after another, there’s evidence of a fundamental shift in supply and demand dynamics within the reinsurance sector.

“After years of excess capacity, loss uncertainty and the changing world order have combined to create some of the most challenging market conditions in two decades. Pricing and risk appetites are responding accordingly. No two cycles are the same, however, and new capacity could very soon be enticed into the market, given current rating levels and the higher potential returns on offer,” said Bradley Maltese, Chief Executive Officer (CEO), Howden RE.

“Capital providers’ price expectations have continued to shift in line with structural changes to the loss environment, meaning that 2023’s reinsurance renewal cycle is likely to see further pricing pressures. Loss experience from here will be crucial: whilst pressure will increase if the wind blows this year, it will be more muted off the back of a loss-free second half. Choosing your intermediary carefully is essential in helping cedents secure the best and most cost effective coverage available in the current environment,” he added.

Examining the three Cs in more detail, Howden says that in regards to climate, the P&C industry is in the eye of a price, risk, and inflation storm. Although, as capital inflows have come down as secondary peril losses continue to rise, reinsurers’ resolve to meet rising cost of capital has strengthened, says the broker.

On conflict, the report finds that while Ukraine war claims are likely manageable overall for the insurance and reinsurance sector, some will feel the pain a lot more than others owing to the concentration of losses amongst premium-light lines of business.

The unexpected war losses came soon after the unexpected pandemic losses, which while still evident are fading for most. But the reality is that companies’ exposure to loss aggregation in such a volatile risk landscape has contributed to the transitioning reinsurance cycle witnessed this year.

“Both events have revealed how perils once regarded as ‘distinct’, e.g. business interruption, supply chain failures and price shocks, can in fact be connected and strike simultaneously,” says Howden.

Turning to capital, and Howden is the latest to predict a decline in dedicated reinsurance capital levels for 2022. In fact, the broker says that market conditions have resulted in a $46 billion decline in capital at H1 2022, and a projected year-end reduction for the first time since the financial crisis.

“Unlocking capital in order to find solutions for risks that may soon outgrow the sector’s capital base will be crucial to maintaining relevance and offering clients coverage that meets their rapidly changing needs. Clients demand better data, world class analytics, scale and a unique blend of capital markets and risk transfer. In these market conditions, clients need a new approach to broking that is innovative, aggressively entrepreneurial and home to the sector’s strongest talent. In 2023, Howden Tiger will be delivering just that,” said Elliot Richardson, Chair, Howden RE.

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