Early signs of capacity shortages did not materialise for Japanese insurers as the overall supply-demand balance for reinsurance remained “delicately poised” at the April 1 property catastrophe renewals, according to Gallagher Re’s 1st View report.
However, even though there was enough capacity available to meet client needs, since the largest capacity requirement at April 1 remains Japan – which represents a significantly lower than peak US cat exposure demand – the renewal cannot be regarded as a true test of market supply demand dynamics, analysts noted.
Unlike January 1 renewals – when there was an evident client-led underwriting process according to Gallagher – the latest renewal process went more orderly for Japanese buyers, as both client and reinsurers’ expectations were better aligned.
According to the report, this was aided by both the long-term nature of reinsurer relationships in the Japan market as well as the considerable improvements in primary underwriting that Japanese insurers have achieved in recent years.
“Unfortunately, in other smaller markets there were examples of major structural changes being enforced at the last minute and quotes being delayed to minimise negotiating time,” said James Kent, Global CEO at Gallagher Re.
“The impact of these structural changes has been both unexpected and profound on the financials of some insurance companies and is leading to an immediate impact on their original underwriting with all the challenges that this entails, causing significant strain in some of the client and reinsurer relationships.”
Regarding capital, Kent noted that supply remained constrained with few signs of fresh capital entering the market and existing reinsurers being impacted by mark to market investment losses. ILS issuance is picking up and remains expensive compared to previous years with pricing and capacity in line with traditional indemnity pricing.
Looking at how renewals developed per region, the report highlighted that initial fears of capacity shortages did not materialise for Japanese property cat insurers, with demand and supply remaining broadly balanced; and some reinsurers seeking to benefit from positive rate movements – insurers saw typical rate increases of between 15% to 25%.
The report also found that early quotations were exceptionally wide in range, noting that the highest attaching layers saw the most significant quoted increases as reinsurers stressed minimum rate-on-line requirements. Analysts observed that a two-speed market became apparent, with reasonable pricing for expiring capacity contrasting with opportunistic quotes for significant new capacity.
Compared to other perils, earthquake business generally remained more sought after by reinsurers, both on excess of loss and pro rata basis. Catastrophe (Earthquake) Pro Rata Treaties remained in demand with reinsurers and renewed smoothly.
According to the report, many buyers in the region managed increased pricing requirements through co-participation and small increases in attachment points; and reinsurers widely recognized the improvements in technical pricing adequacy in the last three years, resulting in an orderly conclusion of renewals.
The report noted that the renewal period also saw continued reinsurer pressure on pricing and structure following recent large domestic and Japanese Interest Abroad (JIA) losses. Buyers pursued diverse structural strategies to resolve reinsurers concerns about the long-term viability of their per risk reinsurance protections.
In Japan, Per Risk placements saw tough terms and conditions imposed. Analysts noted that overseas exposures were threatened significantly more harshly than domestic ones, but many buyers managed increased pricing requirements through co-participation and small increases in attachment.
Additionally, reinsurers requested a large number of coverage changes but buyers were able to push back on most of these. Ultimately, Gallagher Re analysts stated, sufficient Per Risk excess of loss capacity was secured.
In the US, the market was more orderly than it was at January 1 – insurers saw cat rate increases of between 30% to 50% -, with great clarity around available capacity, terms and conditions, the report concluded. Regarding pro rata, some insurers with less profitable programs had to make greater net retentions; there was also increased focus on embedded cat coverage.
According to Callagher, the first layers of risk excess and cat programs were particularly challenging to place as reinsurers looked to move up programs. Accordingly, many buyers also increased net positions via co-participations, annual aggregate deductibles or fixed retention increases.
Additionally, on cat programs, focus remained on secondary perils, with some reinsures seeking to restrict coverage to the peak perils of Earthquake and Hurricane. Top layer pricing came under pressure as reinsurance substantially increased their minimum premium requirements in response to their own cost of capital, analysts explained.
Also Cyber, Communicable Disease, Terrorism, Strike and Riot (SRCC) became a frequent point of discussion with reinsures seeking to restrict coverage. The report found that reinsurers in the US continued to reserve nationwide, multi-reril capacity for core clients and renewal lines, so were more inclined to review new opportunities on a region or peril specific basis.
For the Caribbean and Latin American market – with the latest seeing a cat rate increase between 15% to 35% -, capacity for large property cat programs in the regions was tight. Some reinsurers struggled to allow for natural exposure growth and as a result were carefully assessing accounts and their deployable capacity.
In some peak cat proportional placements with large expiring events limits, analysts explained, buyers chose to slightly reduce event limits and/or reduce growth rejections to ensure full placement of their proportional treaties.
Finally, in India – a region that saw cat prices go up by 25 to 90% -, aggressive reinsurance rate increases in cat free years unsurprisingly led to a delayed renewal, the report stated.
High loss activity in the risk market ensured significant price increases for excess of loss programmes, however commissions and pro-rata treaties remained nearly flat. Capacity was adequate, but despite the steep increases many reinsurers had limited appetite, especially at the higher end of programmes, according to the report.
Kent concluded: “The reinsurance market remains stressed as reinsurers seek to achieve reasonable returns on their capital whilst nursing large mark to market investment losses. Headline capital in the global insurance industry has reduced as a result of investment losses but provided reinsurers do not have to realise these losses through the early sale of underlying assets the underlying economics remain sound providing ceding companies with secure capacity.
“The hopes of some buyers that new capacity might enter the market at this renewal– and some signs of amelioration in hardening terms and conditions would emerge– remain unfulfilled. This is pushing primary companies back to reexamine their original underwriting strategies, which in the current strained economic environment is extremely demanding to address with original policyholders.”