Costs, climate, inflation show higher prices

MONTE CARLO, Monaco — Reinsurance buyers are likely to face rate hikes on Jan. 1, 2023, renewals as reinsurers say exposures are rising due to rising costs and climate change and inflation is driving claims higher.

In addition, reinsurance capital is shrinking as higher interest rates attract investors to other investments and some reinsurers pull back, squeezing reinsurance capacity while demand increases.

Gathering in Monte Carlo last month for the Rendez-Vous de Septembre, which traditionally marks the start of the year-end renewal season, reinsurers and reinsurance brokers said property reinsurance prices will see significant increases and non-life insurers are likely to see lower deductibles. commissions when losses mount.

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“We’re definitely in a shifting, hardening market — no doubt about it,” Jill Beggs, Warren, New Jersey-based head of North American reinsurance at Everest Re Group Ltd., said at the meeting, which was held in person for the first time since Covid-19 – the pandemic hit in early 2020.

Reinsurance rates were unchanged or included modest increases for many cedants at January 1, 2022, renewals, but spring and mid-year increases were often larger.

“When we started having the inflation discussions after 1/1, that’s really when the market started to tighten,” Beggs said.

“There’s a sense that there’s just not enough money in the system to fund losses,” said Tim Gardner, New York-based global CEO of Lockton Re, a unit of Lockton Cos LLC.

While the Florida market is different from many other markets — particularly because of how insurance rights can be assigned to a third party — the mid-year increases that Florida cedants saw set a tone for the reinsurance market, he said.

“One of the things we felt a lot was in June and July that the momentum shifted in the reinsurers’ favor,” Gardner said. “It started getting a knock on beyond just cat.”

As insurers assess the impact of inflation on insured values, they will likely seek to buy increased reinsurance limits totaling between $10 billion and $15 billion, said David Priebe, New York-based chairman of Guy Carpenter & Co. LLC.

“Against that backdrop, we have yet to see the equivalent capital increase to re-enter the market to meet the increased demand,” he said.

Several reinsurers have withdrawn property catastrophe capacity over the past year.

Pricing is likely to increase as a result and is felt most severely in secondary risk coverages, such as wildfires and winter storms, where inflation has increased the size of losses so they are more likely to penetrate reinsurance programs, Mr. Priebe.

Catastrophe speeds

Premium increases for US property catastrophe risks will be “very substantial” by the end of the year to reflect increased inflation and increased exposure, said Jean-Jacques Henchoz, CEO of Hannover Re.

“After a few years of increased activity, we need to see significant adjustments to the terms,”
said mr. Henchoz.

Rising inflation will lead to economic volatility, said Torsten Jeworrek, chairman of Munich Re’s reinsurance committee.

“The next renewal is much, much more challenging than last year’s where we had a much more financially stable environment,” he said.

Modeled loss costs, including materials, labor and other factors, have increased 20% over the past 12 months for some U.S. real estate exposures, said Marcus Winter, president and CEO of Munich Re US in Princeton, New Jersey.

“There have been price increases on the reinsurance side but not to the extent that is necessary, which is why we expect significant price corrections over the next 12 months,” he said.

Demand for reinsurance coverage in the U.S. is such that some cedants returned to the market for additional capacity after the June 1 and July 1 renewals were completed, and Munich Re already in early September agreed to a January 1, 2023 renewal agreement with one of its cedants, it said Mr. Winter.

Increased concentration of people in disaster-prone areas, increased insurance penetration and increased wealth are the main drivers of higher reinsurance claims, says Thierry Léger, Group CEO of Insurance Companies at Swiss Re.

The effects of climate change will also drive up claims but not to the same extent as the other drivers, he said.

“Only 20% of the increase between now and 2040 will be due to climate change,” he said.

The reinsurance market is at a similar inflection point as the insurance market five years ago, when significant multi-year interest rate increases began, said Laurent Rousseau, CEO of SCOR.

Accident

P&C insurers are likely to see lower ceding commissions on pro-rated deals at the end of the year, experts say. Reinsurers pay ceding commissions to insurers to cover business acquisition costs and other expenses and then share the profitability or loss in the book of business.

Casualty reinsurance ceded commissions rose significantly at the Jan. 1 renewals but have since moderated and are likely to decline further at the turn of the year as inflation and so-called social inflation, or higher verdicts and settlements, drive up claims, Ms. Everest said.

Although referral commissions vary by program, “it’s not uncommon” to see them in the low to mid-30% range, she said.

Underlying casualty insurance prices have increased over the past three years, and reinsurers have been willing to pay high ceding commissions to gain access to the portfolios, Lockton’s Gardner said.

But as losses mount, some issuing commissions may decline, he said.