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How Reinsurance Rates Are Contributing to the Hard Market

After more than a decade of soft reinsurance rates, conditions changed considerably, with reinsurance rates increasing for catastrophe-prone property and specialty lines of business.
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how reinsurance rates are contributing to the hard market

The soft reinsurance market conditions that had prevailed for close to 15 years came to an end in 2020. Since then, 40-year high inflation rates that have been exacerbated by the war in Ukraine, a challenging 2022 storm season, concerns over climate change, and investor pressures to improve performance are all factors that have been impacting reinsurance rates and capacity offerings, according to “Aon's Reinsurance Aggregate (ARA)—Results for the Year to December 31, 2022" report.

These headwinds, coupled with a complex reinsurance renewal period this year in which reinsurers followed strict underwriting guidelines and tightened treaty terms and conditions with new exclusions, combined to drive insurance prices up during the first quarter of 2023, according to the report.

Common exclusions added by reinsurers include communicable diseases and cyber. New this year was an updated cyber war exclusion covering attacks that could cripple a nation's ability to function. While this has raised some concerns within the industry, it may offer more benefits for policyholders.

Overall, the lines of business most significantly impacted by increasing reinsurance rates include catastrophe-prone property risks and specialty lines of business.

“Reinsurers are focused on improving the bottom-line results, since legal system abuse, inflation and climate change have really taken a toll on industry results over the past five to six years," says Kerri Hamm, executive vice president, head of business development, Munich Re U.S. “Reinsurers are focused on getting high-quality quantitative and qualitative information, which they used to deepen their analyses of significant loss exposures."

Further, after years of low-interest rate returns on their fixed-income portfolio along with poor underwriting margins, reinsurers are looking to reset the market by putting upward pressure on pricing and regaining some capital, which declined by approximately 15% in 2022, according to Beinsure.

While insurers were able to purchase the reinsurance protection they needed during the January renewal period, it was at significantly higher rates and retentions. In the commercial property segment, property rates rose by 20% in the first quarter due to large increases in reinsurance costs, according to CIAB—while some reinsurers partially or completely withdrew from the property & catastrophe segment in an effort to limit losses. Specialty lines closely connected to war, including marine and aviation, also saw rate increases linked to increasing reinsurance costs.

More recently, commercial property reinsurance rates rose between 30% and 50% for accounts with catastrophe losses at June 1 and July 1 reinsurance renewals, according to a report from Gallagher Re. While significant, such increases were less than those experienced earlier in the year as mid-year property catastrophe capacity improved with top layers on some oversubscribed U.S. national programs, according to an Aon report.

Looking ahead, changes in terms could be even more important than higher pricing, with the property reinsurance market in true hard market territory for the first time in over two decades, according to analysts at JMP Securities LLC. As claims inflation is expected to continue through 2023, reinsurers are expected to continue to push further price increases and higher limits in this line.

However, “there are certainly opportunities for reinsurers to expand their portfolios in ways that are responsible and healthy, especially as insurers desire not just high-quality capacity, but also market insights and risk guidance that knowledge-based reinsurers can bring to the table," Hamm says.

The hard market requires that risks are explained and negotiated in every detail, both in numbers and in words. Meanwhile, insurers and reinsurers are looking for more information and transparency before assuming any risk.

As agents look to provide coverage for clients in this atmosphere, “my advice is for agents to read the forms, learn the coverage, and get into the details," Hamm says. “I also recommend specializing where possible: Join a trade association and really get into the details of the businesses that you are insuring and get to know the deeper business needs of your clients."

Olivia Overman is IA content editor.

Monday, October 9, 2023
Commercial Lines
Big I Markets