Reinsurance News

Sellers market persists as attachment levels & costs rise at July renewals: Gallagher Re

1st July 2022 - Author: Luke Gallin

Almost all buyers of protection were able to secure their reinsurance coverage at a July 1st, 2022, renewals shaped by economic factors which helped to sustain market hardening, according to Gallagher Re’s 1st View report.

Reinsurance renewalsAfter a late and tough June 1st reinsurance renewals, all eyes turned to the later mid-year renewals in July amid a reduction in reinsurer appetite for natural catastrophe risk, and a combination of macro-economic factors.

But while nearly all buyers were able to secure cover (suggesting some could not fill programs), Gallagher Re notes that in many instances both attachment levels and the cost of reinsurance were higher than buyers wanted. Additionally, says the broker, restricted supply in some lines and territories led to stresses not seen for a number of years.

“Overall, the reinsurance market’s firming trend continued,” says global reinsurance broker Gallagher Re in its 1st View renewals report.

According to the firm, numerous economic factors helped to sustain the hardening trend, including the impact of inflation and rising interest rates on reinsurers balance sheets and reserves, combined with concerns that a recessionary environment may lead to higher claims frequency. These factors, alongside sustained loss levels, enabled reinsurance firms to maintain upwards pressure on rates at the renewals.

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As in June, reduced appetite for nat cat exposures among reinsurers impacted the property catastrophe renewals at 1/7. This ongoing trend, as well as losses (notably in Australia), pushed property cat reinsurance rates up across all territories.

However, Gallagher Re notes that there were signs of pricing reaching distress levels on some Florida and Australian placements.

The impact of inflation on both underlying portfolios and reinsurers exposures came under further scrutiny on all lines of business at the renewals, with sellers looking to explicitly apply additional inflation loadings if buyers of protection could not show their own original pricing actions to manage the current trend.

Away from the stressed property market, Gallagher Re notes that long-tail casualty placements remained largely popular with reinsurance companies, although the ceding commissions debate intensified as reinsurers’ concerns over higher rates of inflation and its impact on claim awards continue to grow.

In the insurance-linked securities (ILS) markets, the reinsurance broker notes similar conditions to the traditional renewals, characterised by increasingly selective investors reducing available capacity to some buyers. In turn, the cost of risk transfer via ILS continued to rise.

Yields and spreads have been on the rise in the ILS space in 2022, which has attracted new investors to the asset class. However, Gallagher Re says this is yet to reverse the overall pricing trend.

Unsurprisingly, given Russia’s ongoing invasion of Ukraine, political and social factors also played a role across the mid-year renewals. The war in Ukraine has led to heightened attention on cyber and war contract provisions. At the same time, Gallagher Re says that progress towards improved ESG protocols has become of universal interest to cedent and reinsurer stakeholders.

James Kent, Global Chief Executive Officer, Gallagher Re, said: “Reinsurers are more sensitive to losses and wider external events than they have been since 2008. The discussions about inflation have been detailed and technical, with reinsurers very willing to challenge cedants’ model outputs. Alongside their concerns about primary rate adequacy in the new inflationary environment, most reinsurers are assessing reserve adequacy as interest rates rise. They are being impacted on the asset and liability sides concurrently, which has fuelled their resolve to keep the price momentum of the past two years moving forward.

“That said, in classes and territories where capacity is constrained, we’ve sometimes seen commercial considerations trump technical pricing. Relationships are very important, and competition – while muted – is still present.

“Within those renewal dynamics, reinsurance buyers have been able to acquire most of the coverage they wanted, if not at the prices they had hoped for.”

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