Analysts at Howden have observed a “reset” in the reinsurance risk landscape during the January 1st renewals, as a series of ‘megatrends’ upped the complexity of an already complicated underwriting environment.
Reporting on the critical renewal period, the broker argues that the insurance macro-fundamental environment is clearly shifting, with higher inflation, lacklustre investment yields, elevated catastrophe loss activity, climate change, new cyber threats and heightened risk aversion making the landscape more challenging to predict.
However, at the same time healthy capitalisation puts the sector in a strong position to tackle these changes, with $26 billion of new capital having entered the market in 2020/21.
Howden noted that changing inflationary and loss trends had a tangible effect on supply and demand dynamics in more challenged areas at 1/1, with some buyers seeking to secure additional coverage in response to increasing exposure assumptions.
Capital providers’ appetite was meanwhile moderated by requirements around structure, terms and price, in addition to a desire to control volatility.
A year of more than $100 billion of insured catastrophe losses reinforced carriers’ concerns around price adequacy and catastrophe model efficacy, with secondary perils in particular set to be an area of continued market focus and action in 2022.
Despite this, Howden explains that strong capitalisation and abundant capacity helped to cap the degree of firming at renewals, as dedicated reinsurance capital rose to the record level of $421 billion at YE2021, led by record catastrophe bond issuance as well as continued growth in traditional capital.
This was offset marginally by a sizeable portion of trapped capital in the collateralised market, where investor fatigue from the five-year run of sizeable losses prevented reloading on the scale seen in previous years.
For retrocession, trapped ILS capital and another year of large loss events created a difficult renewal, meaning risk-adjusted retrocession catastrophe excess-of-loss rates-on-line rose by 15% on average.
Howden believes that climate change and the attendant issue of catastrophe model efficacy were decisive factors this year, with the unusual mix of secondary events fuelling sentiment that changing weather patterns are now increasing both the frequency and severity of climate-sensitive perils.
The broker’s Global Property-Catastrophe Risk-Adjusted Rate-on-Line Index rose by 9% at 1 January 2022, which was higher than the 6% recorded last year, and the biggest year-on-year increase since 2009, taking the index back to pricing levels last recorded in 2014.
In terms of casualty reinsurance, ample capacity, fed by higher rates and improved profitability on original business, provided a more constructive backdrop for casualty reinsurance renewals, Howden added.
“A host of factors contributed to unusually late renewals this year, with 11th hour secondary perils complicating the process further,” said David Flandro, Head of Analytics. “The market is faced with known unknowns like climate change, inflation and lingering COVID concerns, all of which are creating uncertainty.”
He continued: “Nevertheless, with insurance capital currently at record levels, and premiums rising on the back of higher pricing and heightened risk awareness, this remains a resilient and well-capitalised marketplace that can manage these challenges.”
José Manuel González, CEO, Howden Broking, also commented: “Irrespective of market cycles, clients expect the insurance sector to innovate, to develop creative solutions and to offer sufficient capacity during what is one of the most significant periods of change in living memory.”
“We see climate risk as one of the primary concerns for (re)insurance in this decade. Insurers must be prepared to re-evaluate climate-related risks proactively, and to provide a level of flexibility in underwriting solutions in order to maintain coverage ability whilst also creating new and innovative products,” the CEO explained.
“This will be no easy feat, and insurance will be a critical component in driving the mitigation and adaptation needed to confront climate change risks and deliver long-term profitability.”
