What carriers can expect for reinsurance renewals

Arrows pointing up symbolizing business growth

Primary insurance carriers can expect for the most part flat to high single-digit premium increases during Jan. 1, 2024, reinsurance renewals, Matt Wolfe, Aon Canada’s president and CEO of Reinsurance Solutions tells Canadian Underwriter. 

It’s a far cry from the high double-digit increases carriers saw during the Jan. 1, 2023, renewal season. Increases varied from a quarter percent for loss-free clients to upward of 50% to 70% for clients with Cat losses. 

What exactly shaped last year’s renewal season?

Over the course of the last few years, conditions were favourable and reinsurance capacity was relatively easy to come by. That is, until 2023.

“The reinsurance business, like any business, is driven by supply and demand. The greater the supply, the weaker the demand, the better the pricing environment for buyers,” Wolfe said. 

“The most recent years [prior to 2023] were kind of a buyers’ market, when there was robust supply,” he said. That’s because new capacity—whether from pension funds, capital investments, or new entrants — was entering the market and demand was reasonably flat.  

All the while, however, supply chain challenges and natural catastrophes were hurting insurers’ loss costs.  

“Those losses obviously cost money, and so in a sense they directly diminished reinsurance capacity,” Wolfe said. “But a far bigger impact was their contribution to weak reinsurance sector earnings over the period 2017-22, which pushed several capacity providers to the conclusion that their capital was better deployed elsewhere in the insurance ecosystem.”

Then, retro reinsurance — basically, reinsurance for reinsurers — became much more difficult to get. That was after Berkshire Hathaway non-renewed a swath of policies. 

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Plus, companies with both a primary insurance and a reinsurance arm were more keen to grow their primary business, since it promised a better return and lower volatility.  

Those factors, among others, meant reinsurance demand was skyrocketing, while supply was receding. 

Increased losses due to climate change proved to be a significant challenge for reinsurers. Hurricane Ian pushed the market over the edge, causing reinsurers to question if there would be enough supply. The storm caused in the range of  $52.5B in insured losses, mainly in the U.S.

While those factors dragged supply down, inflation meant insurers needed even more coverage, shooting demand upward.  

“The issue is, now with inflation, you don’t need $100 million [in reinsurance coverage], you need $110 million. But this was happening to every insurance company at the exact same time.” 

The disparity between supply and demand was major. “Supply is down 15%-plus, and demand is up 10%,” Wolfe explained. “That gap was almost 20, 30%.” 

Along with increased pricing, reinsurers required carriers in Canada to retain higher portions of their risk. 

As we look to the January 2024 renewals, however, reinsurers and carriers can anticipate a fundamental correction from the low supply/high demand environment in 2023.  

“Our expectation is…somewhere between risk-adjusted flat, or where the existing price is, to plus 10%,” said Wolfe.  

The price will, as usual, depend on the carriers’ claims history. But one benign year doesn’t mean all’s well that ends well. 

“We probably are going to need to see a couple of years of better reinsurance results, and the hope is that the sector is deemed attractive enough that new players will come in, that there’ll be new reinsurers formed and that new capital will come in.” 

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