After a hesitant start to the year, reinsurers have experienced “tangible pricing momentum” at the mid-year renewals, according to Willis Re, although improvements are falling short of those seen in the primary markets.
The broker’s 1st View report observed reinsurance pricing increases across most territories at the July renewals, with some tightening in terms and conditions.
The push for better terms has been underpinned by the continued loss development on major natural catastrophe events from 2017 and 2018, compounded by further medium-sized losses and prior-year loss development in several long-tail classes.
Many of the smaller natural catastrophe losses emanate from less well-modeled perils, Wills Re noted, which has impacted capacity particularly for aggregate placements, and caused reinsurers to revisit their underwriting models.
This trend was most notable in the June 1st Florida renewals, where a number of insurance-linked securities (ILS) markets and a few traditional reinsurers pulled back shares, materially influencing market pricing for some clients.
Predictably, this shift was most noticeable for clients seeking new limit and resulted in them paying higher returns to secure new capacity than that needed for renewal limits.
“Recent smaller catastrophe losses from perils that are less well modeled allied to continued loss creep from larger events are challenging parts of the market, and causing some reinsurers to revisit their underwriting models,” said James Kent, Global CEO of Willis Re.
“This was most notable in the Florida renewals, where pricing took an upward direction, particularly for cedants seeking new limit.”
Kent added that some players who significantly relied on ILS retrocession capacity are finding their business models under stress as this capacity has pulled back.
However, the change in ILS capacity has also left an opening for reinsurers who are less reliant on retrocession capacity to expand their portfolios in the improving pricing environment.
Despite these pressures in some sectors, buyers have been able to secure sufficient reinsurance capacity at June 1st and July 1st, although there is a widening gap between primary companies with portfolios and operating models who reinsurers find attractive and those they do not.
Some insurers have demonstrated that they can estimate their losses accurately, but others are reporting persistent deterioration on their initial estimates, leading to a significant pricing gap between clients, Willis Re explained.
Non-marine retrocession coverage saw the greatest price increases of up to 35% for loss-hit programs, while loss-hit Florida and U.S.-nationwide property catastrophe and per-risk exposures saw prices rise by up to 25%.
Kent continued: “Retrocession buyers have also felt the impact of the market’s changing appetite, putting the business models of some buyers under scrutiny as ILS capacity in particular has pulled back — and boosting the opportunity for traditional reinsurance carriers who are less reliant on retrocession capacity.”
“Overall it remains a functional and logical reinsurance market with preferred pricing and capacity for cedants viewed as superior partners,” he added.
In terms of casualty classes, reinsurers are also seeing continued improvements in original rates and reinsurance terms, Willis Re found, although it voiced concerns over the level of reserve redundancy in past year reserves.
Overall, Kent believes the reinsurance market remains well capitalised and able to provide stable capacity to buyers, albeit on an increasingly differentiated basis.
“The logical differentiation in the response and approach from most reinsurers appears not only rational but indicates that reinsurance capacity remains somewhat discerning,” he stated.
“On that basis, we remain confident that the market continues to function in an appropriate fashion, with superior pricing and capacity made available for the clients viewed by reinsurers as preferred trading partners.”