Mike Mitchell, Head P&S Underwriting Reinsurance at Swiss Re, has assured that some of the stresses of the January reinsurance renewal should “disappear” during the later renewal periods this year, even as efforts to rebalance market dynamics continue.
Mitchell and Gianfranco Lot, Head Globals Reinsurance at Swiss Re, recently shared their views on some of the key issues that the industry can expect from the April and July renewals this year.
They noted that January posed major challenges for both buyers and sellers of reinsurance capacity, as efforts to rebalance the supply and demand equilibrium caused “increased stress in the system.”
“Put simply, there has been too much capacity flowing into the industry in recent years. This softened the market and led to an imbalance in reinsurance supply and demand,” Lot explained.
“As a result, reinsurers have often been unable to cover their cost of capital, let alone satisfy shareholders’ expectations while generating new capital to support clients’ needs.”
Much of this excess capacity was driven by various non-traditional capital providers entering the market, they said, but retrocession availability has now become limited following years of poor performance across the re/insurance sector, as investors look elsewhere for better returns.
“As a consequence, many reinsurers were still negotiating their retrocession capacity until the end of December, creating distress for insurers and brokers not knowing if they could complete their placements,” Lot remarked.
However, with retrocessions now in place, Mitchell added that reinsurers now “know exactly what they can and can’t place,” which should result in a more orderly renewal process for negotiations later in the year.
“It’s also important to mention that this renewal is not unprecedented,” Mitchell said. “We have seen supply and demand equilibrium needing to be rebalanced in past cycles,” referring to the renewals following Katrina, Wilma and Rita in 2005 and after 9/11.
But he also warned that conditions in the broader economic environment may be more challenging than during previous times of stress for the market, with globalisation and increased litigation adding further complications.
“While a lot of ground was covered in the January renewals, there remain a number of challenging themes around what and how risks are covered by reinsurance contracts,” Mitchell asserted. “For the industry to attract enough new capital to meet significant demand growth, we need to continue to work to address systemic risk themes.”
“Prior to the renewal there was a perfect storm developing which meant that reinsurance wordings, structures and prices needed to be strongly reviewed during the 1.1 renewal,” concurred Lot.
The Swiss Re executives also noted that terms and conditions for reinsurance contracts have dramatically deteriorated over the past 10 years, with structures increasingly providing cover designed for earnings volatility rather than capital preservation, as the market softened.
But the momentum for price increases and stricter terms have only grown over the past year as natural disaster losses, along with destabilising global events such as COVID and the war in Ukraine, have heightened earnings volatility for reinsurers.
At January 1, property business was heavily constrained regarding cat capacity availability because of the heavy losses in the US and Europe, Mitchell pointed out, with many reinsurance players either withdrawing completely or limiting capacity, and ILS capacity remaining trapped following prior-year losses and Hurricane Ian.
For specialty lines, there was also a mix of very hard and softer conditions as lines were impacted by the Ukrainian conflict and economic volatility.
Looking ahead, Lot maintained that these outcomes mean that “budgets and/or the scope of covers will need to be significantly adjusted” as the market heads into future renewals.
“Elsewhere, structured solutions will become crucial in helping insurers address some of the impacts of increased retentions and underlying capital management concerns,” he continued. “In addition, we are seeing increased traction for reinsurance solutions, which help clients to get a different perspective on risk.”
“And finally, I would add that relationships do matter,” Lot concluded. “The trust and mutual reliability that Swiss Re has established with clients over many, many years was a vital component in this renewal.”
