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Rarely has the world’s reinsurance community approached the critical 1/1 renewal period with such equanimity. Almost wherever you look there is a feeling of ‘steady as she goes’ with no serious threats to the return to profitability of the last few years.
In 2023, it was the expectation of a hard market that drove the renewals season.
That turnaround from the trough of the soft market years has been hard won and no one wants to let go of it. According to AM Best, the combined ratio of global reinsurers has picked up from the loss-making 110.3% nadir in 2017, returning to a marginal positivity of 96.2% in 2022 before ending 2023 at a healthy 91.5%, producing a return on equity in excess of 20%, something not seen for over a decade. Higher investment returns have also played a major part in the uplift to the bottom line.
Predictions for the outturn for 2024 are similar. So, what will it mean for insurance companies and their investment teams and their strategies?
This is despite the major hurricanes– Helene and Milton – that battered the United States in the autumn. According to Swiss Re, these helped lift the likely outturn for losses from natural catastrophes in 2024 to US$135bn, with two-thirds of those losses in the United States. Flooding in southern Europe also ratchetted up the losses late in the year.
“The rise of secondary perils such as hail and wildfire, presents difficulties
as these are not modelled to the extent as primary perils.”
These were a timely reminder to the market, as renewal negotiations opened, hat such events have to be priced in, said David Govrin, Group President and Chief Underwriting Officer at Bermuda-headquartered reinsurer SiriusPoint. “The international property cat markets, as a result, are expected to look for price and retention improvement following another challenging year of cat severity outside of the US as part of the increased global catastrophe severity.”
The steadying influence of these losses was also highlighted by Claire McDonald, Chief Executive Officer of SCOR Business Solutions. “The market is relative calm. Helene and Milton were not big enough to move the needle in the corporate space.” For her the concerns lie elsewhere: “The rise of secondary perils such as hail and wildfire, linked with climate change, presents difficulties as often these are not modelled to the same extent as primary perils.”
The message from direct insurers is similar. At its recent investor presentation, Zurich’s Group Chief Underwriting Officer, Penny Search, told investors: “You see more price adequacy in the property market and that’s not expected to shift up and down. It will go down a little bit, it will go up a little bit but, broadly, it is expected to remain within a range.”
Climate change is one of the squalls in those otherwise calm seas.
It is high up on Govrin’s list of concerns for the future: “The global aggregate industry losses for catastrophes combined with the significant damage caused by Helene in inland North Carolina and the rapid intensification of Milton, heighten the focus on climate change and impact on reinsurer risk appetite, structures, and pricing for cat risk.”
Blaz Grollimund, Swiss Re’s Head of Catastrophe Perils, said the industry is looking for action from governments to meet the challenge: “Investing in mitigation and adaptation measures must become a priority”.
While this message might land well in Europe, there must be concerns about how the new US administration populated by several climate change sceptics will respond.
Property catastrophe rates in Europe were already out of line with the rest of the world, even before the recent Spanish floods are factored in, according to figures from Guy Carpenter. The broker’s Global Property Rate Index shows that US property cat reinsurance rates on-line only rose by 1.2% in 2024, with Asian rates up 1.8%. European rates were up by almost 8%. Whether that is enough to give reinsurers comfort that they are positioned to meet losses in 2025 remains to be seen.
On the other side of the Atlantic, it is casualty (liability) trends that are causing concern, thanks to the continuing pressures on claims reserves from social inflation. According to the major ratings agencies most large reinsurers have already seen worrying deterioration in their US casualty reserves in 2023 and 2024, especially impacting the 2015-19 treaty years. This is hitting the combined ratios of several major US property and casualty insurers which, according to figures from Moody’s, have slid from marginally positive territory in 2020 to 96% in the first half of this year. Reinsurers will not want this slippage to impact their portfolios.
Govrin said SiriusPoint is aware of this trend. “US Casualty, on the other hand, is dealing with increased loss costs due to economic and social inflation, which is expected to put pressure on ceding commissions, particularly in more challenged classes of business, such as commercial auto which continues to be a struggle for profitability for the industry.”
These are some positive trends elsewhere.
“There continues to be excess cyber capacity in the direct and reinsurance
markets as reinsurers seek to continue the growth trend."
One area of growth is in cyber, driven by increased demand and the relative profitability of the class in the last few years. With the CrowdStrike incident in July still at the forefront of senior managements in large firms and talk of cyberwarfare growing louder, demand for additional cover is expected to continue. A recent review of the 2025 renewal season by Grant Thornton said the combination of lower-than-expected losses and an excess of capacity could see rates for cyber cover ease:
“There continues to be excess cyber capacity in the direct and reinsurance markets as reinsurers seek to continue the growth trend. This competition, combined with more cybersecurity measures adopted by businesses, will likely lead to reduced cyber insurance rates in the 2025 renewal.”
This does not mean that reinsurers are being naïve in their approach, said Hans Allnutt, Partner at London law firm DAC Beachcroft, who leads their cyber breach response team. “It's quite hard to quantify some of these potential losses,” he said.
“And as I understand it, the primary layers are competitively rated, but if you go above it, you must pay the same rate or more for the second layer, even though you would think that that second layer is a lower risk.”
He added that major insurers and reinsurers are very aware of the dangers of aggregation – taking on too many risks that could all produce major claims at the same time. “They are very aware of aggregation, or the word they use quite often, cyber systemic exposures. Six or seven years ago it was theoretical, these one-off incidents creating major losses. Then had WannaCry, NotPetya, and now this year CrowdStrike,” he said.
“Interestingly, all those examples largely didn't hit the cyber insurance market because either the cyber insurance market hadn't grown enough, or with CrowdStrike it wasn't a malicious cyberattack. But they all point to the real possibility that we could have a single software vulnerability attack or otherwise creating huge, multiple losses across cyber insurance policy. The systemic exposure is significant.”
There is new capital to meet this growth, but it is not flooding into the market, risking any destabilisation Govrin said. “In general, the balance sheets of the insurance industry are well capitalised, so we are not expecting a large influx of start-ups or significant capital raising to fuel premium growth. There is capital raising in the Insurance-Linked Securities [ILS] market, which is expected to continue.”
Where this is happening it underpinning the extension of coverage of risks that were previously struggling to find adequate support in the reinsurance market.
"Our cat bond transfers the risk to the capital markets, diversifying
our traditional reinsurance programmes.”
At the beginning of December, German insurer Talanx issued its first cat bond to provide multi-year protection for earthquake risks in Chile. The cover is written on a parametric basis, meaning it will pay out depending on the strength of an earthquake. The US$100m bond was issued via Maschpark Re, a special purpose insurer established in Bermuda, in co-operation with Talanx subsidiary Hannover Re
“We are a global insurance group enjoying ongoing growth and hence have an increased need for reinsurance protection. We are augmenting our protection for earthquake risks in Chile due to our strong market position there. Our cat bond transfers the risk to the capital markets, diversifying our traditional reinsurance programmes”, said Talanx AG Chief Financial Officer Dr Jan Wicke.
The life reinsurance market tends to cause fewer waves and consequently rarely makes headlines. The global Covid-19 pandemic did prompt some reassessment of the previously universally accepted improvements in life expectancy, and this is still being watched, although causing fewer concerns, said AM Best
“Life insurance remains a good source of diversification for the large global reinsurers. The global life assurance and health reinsurance segments continue to remain well capitalised and positioned for robust growth. Claims from elevated mortality impacts have been manageable, but pinpointing direct causes and future directions has been difficult, although claims have recently levelled off.”
The impact of artificial intelligence on medicine is something else that the life and health reinsurers are monitoring, not least because of the way it could give rise to large casualty claims as a result of medical accidents.
“One of the motivating factors for the initial shift to the Positive outlook for
global reinsurance was the sustained higher interest rate environment."
AM Best said its generally optimistic view of the reinsurance sector as it steers a course through the renewal seasons is also influenced by the added buoyancy it is gaining from the positive investment outlook, still more favourable than for most of the decade following the Global Financial Crisis.
“One of the motivating factors for the initial shift to the positive outlook for global reinsurance was the sustained higher interest rate environment,” said the rating agency. “Not only has the higher cost of capital translated into a stricter underwriting discipline, but as new money has been invested in higher interest rate fixed income instruments, reinsurers have gradually improved their investment income streams.
“Although rates have declined, they remain higher than the rates on most of the older maturing bond issuances in reinsurers' portfolios. Some reinsurers lengthened durations as rates rose, although non-life portfolio durations generally remain within three to five years. With rising geopolitical tensions, the recent US elections, and general economic uncertainty, future interest rate trends are far from clear. However, reinsurers will collect relatively higher levels of dividend and interest income for at least the next three to five years.”
Overall, we are seeing some of the most benign conditions across the reinsurance market for the 1/1 renewals this century.
Whether this will mean good news for investment teams remains to be seen.
