This is in sharp contrast to 12 months ago when the market endured a stressful and late renewal due to a volatile property reinsurance market.
According to Gallagher Re CEO Tom Wakefield: “Property supply and demand has snapped back into balance, with returns for the first three quarters of 2023 exceeding reinsurers’ increased cost of capital, underpinned by the exceptional structural changes achieved last year. Retained earnings, modest new capital raises, ample retrocession capacity and buoyant ILS markets combined to increase available catastrophe reinsurance limit, resulting in a much calmer renewal period.”
He added: “Signs of over-placement on well-structured programs also indicate an improving position for some buyers going into 2024.”
The Gallagher Re 1 st View report delivers insight into current market conditions at key renewals: Jan. 1, April 1 and July 1. Below are highlights of the 1/1 report.
Property
A lack of large US wind events had a positive impact on insurers’ and reinsurers’ results alike. However, there were more than USD100 billion of insured property catastrophe losses in 2023. In the US, severe convective storm losses exceeded USD59 billion. This resulted in US insurers assuming most of the losses net, given increased retentions and the scarcity of aggregate protection.
Pricing and coverage divergence exists in personal and commercial lines, with those operating in tightly regulated markets having limited ability to pass on the increased cost of risk. Some buyers sought capacity from alternative sources of capital, such as catastrophe bonds.
With capacity pressure easing, many primary companies have successfully managed to buy more tail cover. This increased demand for top end protection, particularly in the US, has been supported by the reinsurance market’s appetite to deploy capacity, particularly where non-modelled peril activity is deemed remote. Renewal pricing at this level has consequently been squeezed and signings suggest that there will be further capacity available for those nationwide/global carriers renewing through the rest of the year.
For frequency protections on either an aggregate or low-level occurrence basis, reinsurance capacity has been very tight, leading a growing number of buyers to utilize structured buy- downs to meet their needs.
Casualty
Casualty, notably but not exclusively US casualty, was no longer the valuable currency that was used to support property catastrophe capacity this time last year. Confidence in third- party liability lines has diminished, despite very significant increases in primary market pricing and limit reductions since H2 2019.
There are concerns over the impact of elevated loss inflation and the impact on both current and forward-looking rate adequacy. That uncertainty is amplified by the need to normalize the impact of COVID-19 on reduced economic activity and thereby, loss frequency.
Specialty
In line with recent years, capacity for specialty lines remained buoyant, with coverage, not pricing being the main challenge. The wars in Gaza and in Russia/Ukraine has meant that war on land, political violence and terrorism continued to be in focus.
In cyber, buyers commenced the migration to more non-proportional instruments as the market matures, growing more confident in reducing quota share cessions. The ILS market started supporting cyber bonds during 2023, which has been followed by a growing number of 144A bonds from a variety of sponsors.
Insurance Linked Securities
The second half of 2023 continued the strong catastrophe bond issuance levels seen in H1, resulting in an annual record for nonlife catastrophe bond issuance. Q4 2023 saw the completion of multiple underwritten cyber catastrophe bonds for the first time and a record level of catastrophe bonds sponsored by EU-based insurers.
Gallagher Re sees a large catastrophe bond pipeline building for Q1 2024 with issuance remaining elevated at least through Q2 2024 – driven in part by relative value.
Download the full 1/1 1st View report here.
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