January 1 Renewals Mark a Turnaround in Reinsurance Market Stability

The January 1 renewal period marked a notable shift towards stability and predictability in the reinsurance market, contrasting the previous year’s challenges. Gallagher Re’s "1st View" report credits this change primarily to the property reinsurance sector’s improvements. Twelve months earlier, volatility plagued the market, causing stressful renewals. Tom Wakefield, CEO of Gallagher Re, emphasized the restored balance between property supply and demand, attributing it to reinsurers’ returns exceeding their increased cost of capital and structural changes. These factors include retained earnings, new capital raises, ample retrocession capacity, and a strong ILS market, all contributing to an increased catastrophe reinsurance limit and a calmer renewal period.

Despite a year without major US wind events, insured property catastrophe losses still surpassed $100 billion, heavily impacting the US. The market saw a divergence in pricing and coverage between personal and commercial lines, particularly in tightly regulated markets, leading some buyers to seek alternative capital sources like catastrophe bonds. The reinsurance market’s capacity to deploy in low non-modelled peril areas has met the increased demand for tail cover purchases in the US. However, frequency protections still face capacity constraints.

In the casualty sector, US casualty lines have lost their appeal as a support for property catastrophe capacity, mainly due to concerns about loss inflation and rate adequacy, exacerbated by COVID-19’s economic impacts. The specialty lines market remains robust, with coverage challenges taking precedence over pricing concerns. Geopolitical events have kept war, political violence, and terrorism risks prominent. The cyber market is shifting towards non-proportional instruments, with ILS market participation in cyber bonds.

The ILS market experienced record-breaking catastrophe bond issuances in both halves of 2023, including the first-ever underwritten cyber catastrophe bonds and many EU-based insurer-sponsored bonds. Gallagher Re anticipates a strong catastrophe bond pipeline for early 2024, driven by high issuance levels and relative value considerations.

Guy Carpenter’s report also highlights the January 1 renewal, noting a pragmatic approach to trading partnerships with sufficient capacity, while maintaining underwriting diligence focus.