Capacity conundrums, late negotiations, rate increases and tighter wordings all came into play at 1 January

The 1 January reinsurance renewal has been widely dubbed one of the toughest seasons seen for decades. 

Negotiations for reinsurers’ retrocession capacity continued until the end of December in some cases, leaving many insurers and brokers unsure as to whether they would be able to complete their placements. But what made the 1.1 renewal quite so special?

Mike Mitchell, head P&S underwriting Reinsurance and Gianfranco Lot, head Global Reinsurance at Swiss Re, share their views on three key issues which came into play, and shed some light on what the industry can expect from the 1.4 and 1.7 renewals.

  1. Capacity conundrums and late negotiations

Gianfranco Lot (GFL): “Put simply, there has been too much capacity flowing into the industry in recent years. This softened the market and led to an imbalance in reinsurance supply and demand.

“As a result, reinsurers have often been unable to cover their cost of capital, let alone satisfy shareholders’ expectations while generating new capital to support clients’ needs.”

Mike Mitchell (MM): “Much of this excess capacity was driven by various non-traditional capital providers entering the market, but also existing reinsurers deploying surplus capital to support growth aspirations.

“However, after the losses of the past years, coupled with interest rates rising, many investors are looking for a better performance. This has contributed to the limited retrocession availability in the market.”

GFL: “As a consequence, many reinsurers were still negotiating their retrocession capacity until the end of December, creating distress for insurers and brokers not knowing if they could complete their placements.”

MM: “It’s also important to mention that this renewal is not unprecedented. We have seen supply and demand equilibrium needing to be rebalanced in past cycles – with the renewals following Katrina, Wilma and Rita in 2005 and after 9/11 for example.

“This rebalancing typically causes increased stress in the system during the renewal process, as we’ve seen this year.”

  1. Adjusting contract wordings

GFL: “Prior to the renewal there was a perfect storm developing which meant that reinsurance wordings, structures and prices needed to be strongly reviewed during the 1.1 renewal.”

MM: “Terms and conditions have dramatically deteriorated over the past 10 years. As the market softened, reinsurance structures have provided more and more cover designed for earnings volatility rather than capital preservation.

“Leading up to the 1.1 renewal, contract wordings had become broader and have stretched the boundaries of what was intended by reinsurers, as was demonstrated through disagreements over COVID-19 Business Interruption (BI) claims.

“At the same time, the environment has become more challenging, with globalisation and increased litigation. Wordings need to keep up with these developments.

“While a lot of ground was covered in the January renewals, there remain a number of challenging themes around what and how risks are covered by reinsurance contracts. For the industry to attract enough new capital to meet significant demand growth, we need to continue to work to address systemic risk themes.”

  1. Accelerated momentum for price increases and higher net retentions

GFL: “Last year, reinsurers were hit hard by devastating natural disasters. These events, coupled with the horrific war in Ukraine – which also led to increased inflation rates and impacted aviation and marine war covers – have accelerated the momentum for sharp price increases and higher net retentions for cedents.”

MM: “If we look at selected lines of business, property was heavily constrained regarding cat capacity availability because of the heavy losses in the US and Europe.

“Many reinsurance players either withdrew completely or limited capacity, and ILS capacity was trapped following prior-year losses and Hurricane Ian. This led to increased prices in property lines and changes to contract attachment points.

“For specialty lines, there was a mix of very hard and softer conditions as lines were impacted by the ongoing war in Ukraine and economic volatility.”

Outlook for 1.4 and mid year

Mike Mitchell says that, while the above themes will most likely also play out during the April and July renewals, he expects them to do so in a more orderly fashion.

MM: “Retrocessions are now in place and reinsurers know exactly what they can and can’t place, which means we should see some of the stresses of the 1.1 renewal disappear, while the much-needed rebalancing momentum will continue.”

Gianfranco Lot adds: “We ask clients and brokers to talk to their boards and executive committees about the reinsurance market. This means discussing the outcomes from the 1.1 renewals, which should indicate that budgets and/or the scope of covers will need to be significantly adjusted.”

“Elsewhere, structured solutions will become crucial in helping insurers address some of the impacts of increased retentions and underlying capital management concerns. In addition, we are seeing increased traction for reinsurance solutions, which help clients to get a different perspective on risk.

“And finally, I would add that relationships do matter. The trust and mutual reliability that Swiss Re has established with clients over many, many years was a vital component in this renewal.”