This year's January reinsurance renewals were characterized as 'stable,' 'predictable,' 'orderly,' 'calmer,' and 'disciplined,' marked by 'increased appetites' and a return to supply/demand balance. The shift in tone is notable compared to last year's challenging January renewals.
In a significant departure from a year ago, the abundance of property catastrophe reinsurance capacity at the January 1 renewal surpassed demand, creating a competitive landscape for peak perils and upper layers, as outlined in Aon's market report titled "Reinsurance Market Dynamics – January 2024." Aon notes that most reinsurers approached the renewals with aspirations to expand in property catastrophe reinsurance, contributing to a more consistent market in pricing and terms.
Gallagher Re's 1st View report, appropriately titled "What a Difference a Year Makes," echoes this sentiment, stating, "This year, property supply and demand has snapped back into balance, with returns for the first three quarters of 2023 exceeding reinsurers’ increased cost of capital." The report attributes this equilibrium to retained earnings, modest new capital raises, ample retrocession capacity, and a robust insurance-linked securities (ILS) market, all contributing to the increased availability of catastrophe reinsurance limits.
Reinsurance Buyers Experience 'Smoother' January Renewals with Abundant Capacity: Carpenter
Gallagher Re highlighted that the structural shifts witnessed in the January 2023 renewals were an anomaly, with the subsequent renewal period in January 2024 proving much calmer and showcasing improved alignment of expectations among all involved parties.
Aon's report emphasized that the January 1, 2024 treaty renewal unfolded smoothly, benefiting from a rebound in profitability, capital rebuilding, and increased availability of retrocession capacity. This positive environment prompted many reinsurers to exhibit heightened appetites at the enhanced terms established in 2023.
Howden, in its report titled "A New World," echoed this sentiment, stating that the renewal occurred in a more favorable supply dynamic and underwriting discipline, resulting in a stable and orderly process. Pricing remained generally stable, with variations influenced by loss experience, and structures saw incremental changes following significant adjustments in 2023.
David Flandro, Head of Industry Analysis and Strategic Advisory at Howden Tiger, noted that dedicated reinsurance capital had nearly reached record levels. The reinsurance market's structure continues to evolve, with alternative capital now comprising nearly a quarter of the total.
Retentions remained stable, but pressure on pricing from healthy capacity levels led to strong signings. Capacity for frequency protection was in high demand, causing increased competition and oversubscription of some higher-attaching layers at competitive prices.
As the renewal season progressed, discussions centered on reinsurer signing activity, with excess capacity surpassing demand year on year. Expected returns remained a crucial factor for reinsurers, and while capacity was available where return thresholds were met, some buyers expressed dissatisfaction with the lack of capacity for earnings protections.
Gallagher Re and Howden both indicated signs of over-placements on well-structured programs, suggesting that certain buyers would experience improved positions in 2024. Reinsurers managed to hold their positions in terms of pricing and structure, but not always their shares, reflecting the evolving dynamics of the market.
Cedent Challenges
For many cedents, 2023 proved to be a challenging year, with eroded capital buffers due to unrealized investment losses. Additionally, higher retentions imposed by reinsurers in 2023 further reduced reinsurance coverage. Aon highlighted that insured losses from natural catastrophes remained elevated, exceeding $100 billion for the fourth consecutive year. Howden's report noted that reinsurers' structural retreat from frequency risks in 2023 contributed to increased insured losses borne by insurers, impacting ceding companies globally.
Global catastrophe claims in 2023 were driven by severe convective storm activity in the US and Italy, windstorm Ciaran in France, flood losses in New Zealand, flood and wildfire losses in Greece, a major earthquake in Turkey, and Hurricane Otis in Mexico, according to Aon. These losses not only eroded capital but also introduced more volatility into underwriting results. The increased scrutiny from rating agencies led many insurers to seek additional reinsurance protection in 2024, as reported by Aon.
Ceding companies faced substantial losses from severe convective storms (SCS), surpassing $59 billion in 2023. US insurers bore the brunt of SCS losses net, given increased retentions and the scarcity of aggregate protection, as highlighted by Gallagher. Divergence was noted in personal and commercial lines, with entities in tightly regulated markets having limited ability to pass on the increased cost of risk.
Enhancing Communication for Improved Understanding and Collaboration
Howden’s Report Highlights Improved Reinsurer Communication Ahead of January 2024 Renewals
According to Howden’s report, reinsurers' plans were better communicated in the weeks leading up to January 1, 2024, resulting in reduced tensions and dislocations compared to the previous year's renewal.
Aon concurred, stating that this year's property renewals proceeded promptly, with most reinsurers adopting a more constructive and open approach. After a challenging 2023, global insurers refocused on trading relationships, highlighting the value of consistent reinsurer communication and broad trading relationships.
Differentiation in the behavior of insurers and reinsurers played a crucial role in the January 2024 renewals, according to Aon. Insurers without loss experience in 2023 and those able to articulate positive changes to underwriting portfolios achieved favorable outcomes. Reinsurers that provided timely and constructive quotes, had broad authorization on a program and were seen as valued partners over the past year were rewarded by insurers during the renewal.
In general, insurers sought to reward reinsurers who offered strong support during the challenging 2023 renewals, creating a positive trend in the market.
