January renewals showcase fairly balanced supply and demand dynamics – Moody’s

The January 2024 reinsurance renewals showcased a balance in supply and demand dynamics, leading to moderate price increases across most business lines and a smooth process for reinsurance buyers, according to insights from Moody’s Investors Service.

Despite global insured catastrophe losses in 2023 reaching around $108 billion, significantly higher than the long-term average of $64 billion from 1990-2023, reinsurers reported strong profitability for the year.

A key factor in these results was the retention of most insured catastrophe losses by primary insurers, particularly from severe convective storms in the US and Europe. Other contributing factors to the increased reinsurance capital include robust catastrophe bond issuance, expanded retrocessional reinsurance capacity, and new capital entering the sector.

For primary insurers, some pricing relief was noted for higher layers of reinsurance programs. However, stringent terms and conditions set during January 2023 renewals largely remain. Aggregate reinsurance covers are still challenging to place, leading to a significant portion of overall catastrophe loss being retained by primary insurers in 2024.

Gallagher Re reported that reinsurance pricing for loss-free property catastrophe accounts saw moderate increases in most regions. European and US accounts experienced gains of 5% to 10% and 0% to 10%, respectively.

More substantial price hikes were observed for accounts with catastrophe losses. In the US, pricing for loss-affected catastrophe programs rose between 10% to 50%. The Guy Carpenter US Property Catastrophe Rate-on-Line Index indicated a 5.3% increase at the January renewals, reaching a record high and marking an over 115% rise since 2017.

Pricing hikes for cat reinsurance

Gallagher Re also observed a 10% to 20% increase in pricing for loss-affected catastrophe retrocessional reinsurance, less than the average midpoint increase of +25% over the past seven years. The availability of retro coverage increased as providers sought to capitalize on strong pricing.

Other specialty lines, such as political violence and terrorism coverages, saw 5% to 10% increases. Conversely, cyber reinsurance prices dropped by up to 20% due to a higher supply of reinsurance, creating more favorable conditions for buyers.

Casualty reinsurance prices showed slight firmness, with some pressure on ceding commissions for pro rata treaties. Loss-free excess casualty accounts varied, with prices flat to up 10%, depending on the line and region. Accounts with significant loss emergence saw increases of 5% to 15%. Reinsurers maintained caution in the casualty sector due to factors like social inflation and adverse loss reserve development in older accident years in the US.

Swiss Re estimates that global insured catastrophe losses for 2023, including both natural and man-made catastrophes, were approximately $108 billion. This marks the seventh consecutive year of insured catastrophe losses above the long-term annual average since 1990.

Reinsurers, responding to high levels of catastrophe loss activity, have increased the price of risk transfer capacity. They have also raised attachment points, tightened terms and conditions, and restricted aggregate coverages to reduce volatility and improve returns on capital. These strategies appeared effective in 2023, with most reinsurers expected to report returns on equity in the 15% to 20% range.

Renewals aligned with expectations

The January renewals aligned with expectations from Moody’s Reinsurance Buyers’ Survey conducted in September 2023. The survey indicated most respondents anticipated mid-single digit range price increases for casualty and around 7.5% for property in 2024. The survey also highlighted claims inflation as a significant factor driving price increases, with 95% of respondents noting its impact, and 62% citing lower reinsurance capacity as a reason for higher reinsurance pricing.

Although reinsurance pricing has been on an upward trajectory since January 2018, the January 2024 renewals signal a deceleration in this trend. The mismatch between supply and demand for property catastrophe reinsurance that led to sharp pricing increases last year has eased. Traditional reinsurers and alternative capital providers have deployed increased capacity at attractive risk-adjusted returns.

Given the strong ongoing demand for coverage, reinsurance pricing is expected to remain firm in the upcoming April and July renewal periods, which are key dates for Japanese and US reinsurance contracts. However, the January 2024 renewals suggest that pricing has reached levels sufficient to attract additional reinsurance capital to the market, indicating that significant pricing hikes are unlikely in the near future, barring large catastrophe losses that could alter the balance of reinsurance supply and demand.

What are your thoughts on this story? Please feel free to share your comments below.