Author: Tom Wakefield
January 1 renewal activity saw differentiated outcomes for clients. Reinsurers have been able to refine solutions as a result of more effective use of detailed cedant data, a clearer understanding of strategy, evolving views of risk and application of external data sources. Renewal outcomes are not one size fits all but specific to class of business, geography, performance, strategy and scale. With an increasingly complex landscape, reviewing not only what happened this renewal, but also the how and the why, will help inform the direction of travel.
Underpinning reinsurance renewal discussions, the non-life primary insurance market has enjoyed the results of several years of improved pricing in the property, casualty, and specialty areas. That repricing of risk, coupled with an elevated interest rate environment has put the sector in a healthy financial position (some regionals, impacted by frequency losses being the exception).
Reinsurers have benefitted even more so, with the uplift in primary market pricing augmented by higher reinsurance prices, tighter terms and conditions, and the major reset in catastrophe attachment points. The latter has helped to shield reinsurers from 2024's elevated natural catastrophe losses, as loss patterns continued to trend to frequency of smaller and mid-sized events.
Globally, reinsurers are on track to produce a combined ratio near or below 90% and a low-teens ROE for 2024. Not only have reinsurers' operating and performance ratios improved but so have aggregate balance sheet metrics, providing some context around how quickly and materially the fortunes of the reinsurance industry have changed. This has fueled reinsurers' confidence to take on more risk, to satisfy their own search for growth.
New rated start-up capital, in the region of USD1 billion for 2025, was modest. ILS supply remained strong, with fund managers raising more capital and additional investors coming into the space, having seen attractive returns in 2023 of circa 20%.
We expect recent results to further stimulate targeted investment in the sector in 2025. This trend is beneficial for sponsors aiming to leverage the catastrophe bond market, as transactions in the fourth quarter have yielded favorable outcomes, with reduced spreads and increased deal sizes. While catastrophe bonds represent a standardized and tradable option to invest in the segment, if the bond rates become further decoupled from traditional rates, investment interest in the collateralized reinsurance segment could increase over time.
As expected, the most attractive growth segments experienced the most pressure in pricing, terms and conditions, and vice versa. The result was an average reduction in risk - adjusted pricing across the board in property catastrophe and specialty (with exceptions for loss impacted programs). Pricing ranges are set out in the report and vary by segment, client, region, and whether loss affected or not. While these ranges represent the general market direction, individual cedant outcomes have continued to reflect specific program characteristics more directly, creating significant deviations.
US casualty was an outlier where, notwithstanding a fifth year of underlying rate improvement, the reinsurance market is divided between those who see opportunity to expand amongst the uncertainty and others who have chosen a more moderate approach.
Complexities by line of business and by territory, provided brokers and reinsurers alike with an opportunity to work in much more detail with buyers on the articulation of their portfolios and underwriting strategies. The result has been an improved alignment with reinsurers allowing them to assess each risk and client relationship on its own merits.
In reviewing pricing movements in this increasingly complex landscape, we'd caution that relative changes do not represent a view on profitability. Exposure adjusted rate change is a calculation of year over year price movement and not rate adequacy, multiples of expected loss or other profitability metrics. These calculations are also dependent on the methodology used and can vary widely on the same data depending on approach.
As an example, new top catastrophe layers that were first bought in high inflation and capacity constrained conditions in 2023 required price-points to attract then scarce capacity. Such pricing anomalies have been smoothed out as inflation expectations moderated and capacity increased resulting in significant percentage reductions year on year, albeit modest in dollars.
Property
The catastrophe market is a closely watched bellwether given its disproportionate contribution to reinsurers' results, relative to actual premium derived. The general trend of reduced risk - adjusted pricing is rational and as expected in the face of abundant capacity and strong results for 2024. Placements continued to stabilize from the more fragmented 2023 market activity and remaining areas of differential terms were largely reversed along with other improvements in applicable territories, such as the return of pre-paid reinstalment provisions and enhanced event clause definitions. Low(er) level occurrence and aggregate protections experienced an increase in the number of reinsurers providing support on both a structured and traditional basis for selected buyers. However, there was no measurable erosion in core program attachment points.
Specialty
The specialty market which embraces aviation, cyber, marine & energy, mortgage, credit/surety, and political violence and terror, was subject to a range of dynamics. Several years of improved underlying trading conditions and an abundance of capacity seeking growth equal to or even greater than that in the property catastrophe sector shifted the negotiating balance in buyers' favor.
However, there has also been claims activity in the form of the outstanding Baltimore Bridge loss and to a greater extent the pending resolution of aviation leasing coverage litigation. These two losses could materially impact prior year reinsurance program results and overall trading balances, which had a dampening effect on what might have been if pricing, terms, and conditions had been entirely dictated by supply and demand.
The cyber market continues to develop, and one indication of this is the increasing access to alternative forms of capital. This is apparent in the growth of cyber catastrophe bond offerings, having gone from no cyber cat bonds a couple of years ago to six outstanding cyber cat bonds totaling USD785 million from four different sponsors.
Casualty
The US casualty market was markedly different to both the global property and specialty segments with capacity more constrained, despite continuing improvement in the underlying market.
For some reinsurers, a more rigid adherence to combined ratio targets as their leading performance metric, given the focus on that metric from the investment community, is limiting their appetite to write casualty business. Variations in treatment of these liabilities globally may present an opportunity for IFRS 17 reporters (where claims are discounted, to the benefit of combined ratios.)
For reinsurers able to focus on the total economic profitability of writing casualty and the collateral impact on the combined ratio metric the segment represents an opportunity in a capacity constrained market. For others, a declining market prior to 2020 and the resultant prior year adverse development has called into question some participants' previous profitability assessments. This is especially challenging in long tail classes where the delta between the calendar and accident year results highlights the variance between the forward-and backward-looking view.
Complicating reinsurers' assessment, the performance spreads in the primary market amongst insurers in the same line(s) of business are significant. The impact is a wider range of reinsurer outcomes than other lines of business, which in turn creates more varied risk appetites.
There was adequate support in long tail lines for placements to be completed, albeit the level of required underwriting detail was higher than at any time in the last decade. Capacity was more readily available to those buyers that were able to provide the data, insight, and the supporting evidence to quantify their underwriting, reserving, and claims strategies in the face of a complex lattice of external factors. This was not the year to turn up to the market hoping to anchor to the index. Those buyers that were well-prepared for these technical negotiations had positive outcomes in terms of pricing, capacity or both. The search for long tail revenue outside of US casualty led to a more competitive market for international casualty business with concerns over US exposed business embedded in international programs muted compared to last year--in part because of perceived improvements in the US primary market.
Capital dynamics
The past two years have seen a tremendous improvement in the financial results of the global reinsurance sector.
As mentioned above, operating performance has been strong with low combined ratios and high ROEs. Driven by this, as well as strong investment returns, the capital position of the reinsurance sector has strengthened considerably. At the half-year 2024, for example, the average Solvency 2 ratio of the European 'Big-4' had increased to 281%, well above their average self-imposed target of 200%, and a steady year-by-year increase from 2020's trough of 215%.
The sentiment of investors who finance reinsurers has also improved considerably, at least for the incumbents. Over the past 12 months reinsurers' shares have been the best-performing part of the European insurance sector, and the US/Bermudans for the most part have also turned in a strong performance.
In this context, it is natural that this renewal season witnessed an appetite for 'well-priced risk' from reinsurers seeking to utilize their increased capital. Based on current conditions, this trend looks to continue in upcoming 2025 renewals.
Conclusion
At this point of the reinsurance market cycle there is an increasing emphasis on the direction that primary markets are taking and what this may mean for the reinsurance market outlook in the next 12 to 24 months. Some trends that have started to emerge in the primary market may give rise to challenges going forward as the search for growth and investor demand for more 'of this good thing' puts pressure on supply/demand dynamics. However, there can be no doubt that recent operating results underscore the significant repricing of risk in all major segments over the past several years.
This was a 1.1. where reinsurance supply generally exceeded demand, buyers sought a measure of relief and sellers provided it. It was also a period in which most key trading relationships remained strong. Negotiations and the resultant outcomes were largely conducted with an increased granularity of data both in terms of quality and amount. This has allowed reinsurers to refine their underwriting approach on a case-by-case basis, to properly differentiate between clients while giving themselves increased confidence that they can still achieve their margin targets. Buyer demand also remained broadly stable which implies that insurers are not looking to retain additional volatility irrespective of whether, from a technical perspective they could.
