Reinsurance renewals in June 2021 have shown a continued trend of rate hardening, with risk-adjusted property/catastrophe pricing increasing by an average of 33%.
Higher coverage layers have seen even higher YoY increases of over 40% for earthquake and wind cover.
Despite some recovery in dedicated reinsurance capital since the beginning of the year, capacity shortages have driven increased pricing, particularly for loss-affected programs.
The market conditions have been discussed since January, with multiple factors altering the landscape of risk management.
These trends are significant for the insurance industry, as reinsurance provides a crucial layer of protection for insurers against catastrophic events.
The hardening of rates suggests that reinsurers are becoming more cautious in underwriting risks, due to the increased frequency and severity of natural disasters, as well as the impact of the COVID-19 pandemic on the global economy.
The pricing increases may result in higher premiums for policyholders, as insurers pass on the additional costs to maintain profitability.
Therefore, understanding the market conditions, pricing trends, and challenges in the reinsurance industry is crucial for insurers and policyholders in managing their risks and ensuring financial stability in the face of uncertainty.
Key Takeaways
- Reinsurance renewals in June 2021 show a continued trend of rate hardening, with risk-adjusted property/catastrophe pricing increasing by an average of 33%.
- Higher coverage layers saw year-on-year increases of over 40% for earthquake and wind cover, driven by capacity shortages and financial market volatility, inflation, and geopolitical tensions.
- Risk aversion has been amplified in the current climate, altering the landscape of risk management, and cedents have responded to challenges by increasing retention and altering underwriting guidelines.
- Insurers and reinsurers must adapt to new challenges to continue providing effective coverage and managing risk, and understanding market conditions, pricing trends, and challenges in the reinsurance industry is crucial for ensuring financial stability.
Market Conditions and Factors
Various macroeconomic factors and capacity shortages have influenced the market trends and industry outlook of the June 1 reinsurance renewals, leading to continued rate hardening.
Financial market volatility, inflation, and geopolitical tensions have weighed on renewals, impacting the pricing and coverage of insurance policies.
Furthermore, capacity shortages have driven increased pricing, particularly for loss-affected programs. Memories of Hurricane Ian losses have contributed to this capacity shortage, leading to higher prices for earthquake and wind cover.
In addition to these factors, risk aversion has been amplified in the current climate, altering the landscape of risk management. Parties began discussing market conditions as early as January, with placements beginning in March.
Multiple factors are shifting the industry outlook, as low levels of dedicated capital persist, albeit recovering. Howden Tiger’s Head of North America even referred to the increases as a once-in-a-generation market.
Overall, the market trends and industry outlook of the June 1 reinsurance renewals have been shaped by these macroeconomic factors, capacity shortages, and amplification of risk aversion.
Pricing Trends and Increases
Risk-adjusted property/catastrophe pricing has increased on average by 33%, with higher coverage layers experiencing excess of 40% YoY increases for earthquake and wind cover.
The pricing trend reflects the continued rate hardening in the reinsurance market, driven by capacity shortages and historic catastrophe losses.
This is particularly evident in loss-affected programs, where capacity shortages have resulted in increased pricing.
The capacity shortages have been driven by memories of Hurricane Ian losses and other catastrophic events.
Cedents have responded to these challenges by increasing retentions and altering underwriting guidelines.
This has made lower layers more challenging, and has led to risk aversion in the current climate.
Despite the recovery of dedicated reinsurance capital since its low at the beginning of the year, challenges persist with historically high catastrophe losses, heightened geopolitical and financial risks, and increased connectivity.
Challenges and Risk Management Landscape
The current reinsurance market is facing numerous challenges that are altering the landscape of risk management. One of the major challenges is risk aversion, which has been amplified by the current climate of heightened geopolitical and financial risks. Additionally, macroeconomic factors such as financial market volatility, inflation, and geopolitical tensions are weighing on renewals. These factors are driving increased pricing and capacity shortages, particularly for loss-affected programs.
Risk management strategies are also being impacted by these challenges. Cedents are increasing retentions and altering underwriting guidelines in response to pricing increases, particularly in lower coverage layers. The persistent low levels of dedicated capital in the market, albeit recovering, are also affecting risk management.
The current market conditions are creating a once-in-a-generation market, according to the Howden Tiger’s Head of North America.
As a result, multiple factors are altering the landscape of risk management, and insurers and reinsurers must adapt to these new challenges to continue providing effective coverage and managing risk.
Frequently Asked Questions
How are reinsurers adapting to the challenges posed by the current climate of heightened risk aversion?
Reinsurer strategies to adapt to heightened risk aversion include increased focus on underwriting discipline, risk selection, and portfolio optimization. Market competition drives innovation and diversification, with reinsurers seeking to differentiate themselves through product offerings and technology.
What steps are cedents taking to cope with the challenging pricing environment, particularly in lower coverage layers?
Cedent strategies in coping with challenging pricing environment, particularly in lower layer coverage, include increasing retentions and altering underwriting guidelines.
Risk-adjusted property/catastrophe pricing increased by 33% on average, while capacity shortages drove increased pricing for loss-affected programs.
How are macroeconomic factors such as inflation and geopolitical tensions impacting the reinsurance market?
Inflationary pressures and geopolitical risks are impacting the reinsurance market, contributing to continued rate hardening.
These macroeconomic factors have led to increased risk aversion and capacity shortages, driving up pricing for loss-affected programs and higher coverage layers.
What trends are emerging in the landscape of risk management, and how are they affecting the reinsurance industry?
Emerging trends in the risk landscape include increased risk aversion, low levels of dedicated capital, and altered underwriting guidelines.
These factors are challenging the reinsurance industry, which is grappling with historically high catastrophe losses, heightened geopolitical and financial risks, and increased connectivity.
What are some of the key drivers of capacity shortages in the reinsurance market, and how are they being addressed?
Capacity shortages in the reinsurance market are driven by increased demand for coverage, coupled with low levels of dedicated capital.
The market response includes cedents increasing retentions and alternative capital sources entering the market.
Conclusion
The reinsurance market has experienced continued rate hardening during the June 2021 renewals, with risk-adjusted property/catastrophe pricing increasing by an average of 33%. Higher coverage layers have also seen significant YoY increases, particularly for earthquake and wind cover.
Although there has been some recovery in dedicated reinsurance capital since the beginning of the year, capacity shortages have driven increased pricing, particularly for loss-affected programs. Market conditions have been challenging since January, with multiple factors altering the landscape of risk management.
The current market conditions and pricing trends highlight the importance of effective risk management strategies for insurers and reinsurers. It is crucial for companies to assess the risks associated with their portfolios, including potential loss scenarios, and to implement appropriate risk mitigation measures.
In addition, companies must carefully monitor pricing trends and market conditions to ensure that they are adequately priced for risk and that they are able to offer competitive pricing to clients.
The reinsurance market is likely to remain challenging in the near term, with capacity shortages and continued rate hardening expected.
However, insurers and reinsurers that are able to effectively manage their risks and adapt to changing market conditions are likely to emerge stronger and more resilient in the long term.
By leveraging data analytics and other advanced risk management tools, companies can better understand and mitigate risks, ultimately leading to better outcomes for clients, shareholders, and the broader market. This means business owners will be paired up with stronger insurance carriers to protect them from risks in the future.
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Disclaimer: At The Allen Thomas Group, we are continuously striving to improve the quality and protection of the insurance options our clients receive. We seek to educate people in our community about business insurance options and give them perspective on where the United States market is heading so they can make the best decisions to protect their businesses in the future.
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