The results of reinsurance contract extensions will make life difficult for new companies
The results of the extension of reinsurance contracts, which passed on January 1, will make life difficult for new companies hoping to enter the reinsurance market and benefit from favorable market conditions and high tariffs.
The supply of reinsurance coverage was more in line with insurers’ demand at the date of the last contract renewal after reinsurers decided to restore profitability by reducing reinsurance limits and loss coverage, which created an imbalance compared to the previous year.
“In a market that is well balanced in terms of supply and demand, it is very difficult to create new reinsurance capacity without making serious price compromises,” says Russell Merrett, chief underwriting officer at Lloyd’s Inigo.
Following significant increases in reinsurance rates and reductions in coverage provided by reinsurers during rollovers in 2023, as well as increased profitability of existing reinsurers, new players are slated to enter the market to take advantage of the improved conditions. However, none were launched in time for the latest contract extensions and none have yet raised new capital to provide adequate capacity.
Property-casualty reinsurance rate increases are likely to slow to below 10% on average when contracts renew in January 2024, although underlying returns for the sector will still improve over the year, according to a new report from Fitch Ratings. The COVID-19 pandemic, war, inflation and natural disasters caused by climate change have driven up the cost of reinsurance in recent years, analysts say.
Reinsurance prices continued to rise, but the pace was much slower than in early 2023, particularly for property catastrophe reinsurance, due to increased underwriting by reinsurers. According to a report by brokerage Howden Group Holdings, global prices rose an average of 3% since January 1, following a 37% rise in the previous year.
Reinsurers’ improved financial performance last year, driven in part by their efforts to reduce exposure to smaller but more frequent natural disasters, has given them more confidence to expand options for buyers in early 2024.
“They didn’t have significant catastrophe losses last year, and as a result, many of them were looking to increase their catastrophe portfolios,” says Mike Van Slooten, head of business intelligence at Aon.
Global reinsurer capital will grow to $635 billion in 2023 from $590 billion in 2022, according to an updated Aon report. Reinsurers’ earnings for the full year 2023, due in February and March, as well as rollover results on January 1, will give investors more information. The geopolitical situation, with signs of a war between Israel and Hamas spreading to other parts of the Middle East and elections in more than 60 countries around the world, means that market conditions can change quickly.