Analysts at Gallagher Re have warned that the overall reinsurance supply/demand dynamic remains “delicately poised,” as sufficient capital was available to meet client needs during the April renewals, but could prove more constrained in other markets going forward.
Writing in Gallagher Re’s 1st View report on the 1/4 renewal, Global CEO James Kent notes that this period saw a continuation of the discipline shown by reinsurers at January 1 but with a greater determination that pricing and contract improvements are applied across all territories and to all business lines.
The report concluded that the 1/4 renewal proved “challenging” for reinsurance buyers, who were unable to avoid the “variable but universal” price corrections imposed by reinsurers.
This contrasted to some extent with the January renewals, when some smaller territories were treated more favourably than major mature markets, Gallagher Re suggests, as this differentiation had largely vanished by April.
But in keeping with the earlier renewal period, capital supply remained constrained with few signs of fresh capital entering the market and existing reinsurers being impacted by mark to market investment losses.
Capacity needs were largely met for the April renewals, but given that capacity requirements in Japan – which is a major focus of the 1/4 renewals – are relatively low compared to peak US cat exposures, Gallagher Re does not believe there is yet any clear indication of how the supply/demand balance will look at the upcoming June and July renewals.
“The reinsurance market remains stressed as reinsurers seek to achieve reasonable returns on their capital whilst nursing large mark to market investment losses,” explained Kent. “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,” he continued. “This is pushing primary companies back to re-examine their original underwriting strategies, which in the current strained economic environment is extremely demanding to address with original policyholders.”
For Japanese buyers, Gallagher Re reports that both client and reinsurers expectations were better aligned than at January 1, which led to a more orderly renewal process.
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 minimize negotiating time.
“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,” Kent noted.