Reinsurance broker reports of 1 January 2020 renewal season
Several of the larger reinsurance brokers have put out market commentaries on their experience of the 1 January renewal season. This year we have formal reports from Willis Re and Guy Carpenter and press comment from Hyperion X. We will be making our own contribution in the coming weeks in a Market News, which will focus on the views of the various syndicates and underwriters that we support.
The January 1 renewal season continues to be an important part of the annual cycle of business for Lloyd’s syndicates; more than 20% of Lloyd’s overall premium income emanates from reinsurance. Syndicates are both buyers and sellers of reinsurance, with a large part of syndicates’ outward reinsurance protections being renewed at the start of each year. Japanese reinsurances generally renew on 1 April and a number of regional US contracts (including those for Florida based companies) come up for renewal on 1 June and 1 July. Willis shows a range between reductions of up to 10% for some clean business in Indonesia, through to up to 50% rises for loss impacted risk excess renewals in the USA.
The broker reports are consistent in reporting a nuanced market (“volatile” according to Hyperion, “assymetrical” according to Guy Carpenter and “divergent” according to Willis). All report that pricing was dependent on loss experience, with significant variations in pricing and capacity available according to geography, product line, loss record and client relationship.
2017 and 2018 were respectively the most expensive and fourth most expensive years ever for natural catastrophe claims to insurers and reinsurers. There was some respite in 2019, with catastrophe claims dominated by Hurricane Dorian and Typhoons Faxai and Hagibis, but in aggregate slightly below the ten year average. Nonetheless, each recent claim seems to bring unmodelled (or at least under-modelled) loss components. Coupled with concerns around the medium term impacts of climate change and of model credibility, there is evidence of more cautious catastrophe allocation strategies from reinsurers.
The retrocession market (the market for reinsurance of reinsurance books) is perhaps the most challenged of the reinsurance sector. This area, with potential for excellent results in loss free years, but with a lot of volatility, has become dominated by insurance linked securities using third party investors. Recent results have been poor, with deterioration on initial loss estimates for 2017 and 2018 (Hurricanes Irma and Michael and Typhoon Jebi in particular) causing a loss of investor confidence and redemptions of funds. Some lost capacity was replaced by traditional reinsurance companies but there was generally a shortage of capacity and significant price increases in this part of the market.
Both Hyperion X and Guy Carpenter calculate a rate on line (ROL) index. Rate on line is a fairly crude measure of reinsurance pricing. It is simply limit of indemnity divided by the premium for the risk, so a reinsurance layer of $1m with an annual premium of $100,000 would have a rate on line of 10%. Although a useful short hand, it does not include elements such as increased attachment point, terms and conditions including policy wordings and hours clauses nor changes in broker deductions. Both reinsurance brokers reported increases in their ROL indices, Guy Carpenter by 5%, although Hyperion X, which claims to be a risk adjusted index, saw an average increase of less than 1% for property catastrophe business.
The primary insurance (as opposed to reinsurance) market place continues to harden; Guy Carpenter reports renewal increases of 8% throughout 2019, so with the hard market conditions in the retrocession market, the “U-shaped” market, with larger increases at the two extremes of the market, remains a feature of market conditions.
Those who prefer their content in the form of a podcast may be interested to listen to Mark Geoghegan interviewing James Vickers, who is Chair of Willis Re International and David Flandro, who is Managing Director of Analytics at Hyperion X. Mr Geoghegan was until recently with the Insurance Insider. He has now formed the Voice of Insurance as “an independent place to read about, listen to and examine original ideas on the world of insurance.” Podcast users can find his output through searching for the Voice of Insurance on their preferred app or through his website here.