PwC & S&P reveal a decade of industry game changers
Bermuda ratings downgraded by S&P
Better pricing is helping reinsurers “turn the corner” after years of failing to earn their cost of capital, according to S&P Global Ratings. Its new report finds a hard market in short tail lines across geographies that it predicts will continue throughout 2023.
The report notes that the confluence of the Russia-Ukraine conflict, inflation, mark-to-market investment losses eroding capitalization, and an above-average catastrophe year meant tough negotiations at the January renewals were “all but assured”.
“It appears that the hard market is here, particularly in the short tail lines (property and property catastrophe lines). It’s not just significant rate increases that were in favour for reinsurers, but also terms and conditions, coverages, and limits,” it reports. “It seems that the global reinsurers have run out of patience after trying to catch up with the increasing lost cost trends over the past several years, resulting in multidecade high rate increases in property catastrophe during the January renewals.”
The result was significant rate improvements at the January renewals for short tail lines, with the largest increases seen in property catastrophe. According to certain industry executives, the 2023 renewals rivalled 2006 in the aftermath of hurricanes Katrina, Rita, and Wilma. “However, unlike 2006 when increases were mostly in the U.S., January 2023 renewals price increases were global and broad.”
US property catastrophe saw significant rate increases but global reinsurers were also “pleasantly surprised” by pricing in Canada, Europe, Latin America, and Asia, it finds. Reinsurance risk loss-free pricing changes in the US property ranged from 15% to 25% and from 35% to 150% for risk loss hit. For the UK, the figures were 20%-25% and 30%-40%.
Despite favourable reinsurance pricing, investors remain on the sidelines, except for catastrophe bonds, S&P reports.
Casualty lines saw more “orderly renewals”, however, because reinsurers had enjoyed compounded rate increases over the past few years. “Unlike property, the balance of power remained with cedents as casualty reinsurance capacity was plentiful with reinsurers' increased appetite for this segment,” it notes.
Despite the improvement, S&P also notes that global reinsurers’ operating results have been below par for several years due to more severe natural catastrophes, mounting losses from secondary perils, loss creep, COVID-19-related losses, and increasing losses in some US casualty lines.
“The question now is whether the pricing improvements are sustainable, and whether they are enough to combat the endless headwinds the sector has faced that have muted performance for the past several years,” it states.
“Even though we are cautiously optimistic, we believe it is not done and dusted yet--reinsurers need to maintain underwriting discipline, proactively take underwriting actions, and continue to seek price adequacy in the upcoming renewals.”
As it sums up: “We maintain our negative view on the global reinsurance sector, but we believe the tipping point is coming for a more stable sector view if reinsurers maintain discipline and demonstrate the ability to sustainably earn their cost of capital.”
S&P Global Ratings, Reinsurance, Insurance, Property Insurance, Bonds, Reports