Reinsurance market renewals
The January 1 renewal cycle is important for investor returns as more than half of all reinsurance contracts are renewed in this time frame.
The period is focused on European insurers, select US insurers, and large global insurance companies. This season was highlighted by a stressed retrocession market, a property catastrophe reinsurance market with pockets of opportunity, and a period of active issuance in the catastrophe bond market. These renewal periods provide insight into reinsurance pricing, contract terms, market positioning, and the direction of future trends in the market.
The January 1, 2020, renewal cycle presented ample opportunities to deploy capital at attractive rates. Although capital levels in the reinsurance market have been affected by successive years of catastrophic losses, which in some cases caused trapped capital, in addition to reduced capacity from certain market participants, the overall reinsurance market appears to remain healthy, with ample capacity for cedents,1 albeit sometimes at increased rates.
We continue to witness a bifurcated market, where cedents with loss experience are faced with (sometimes significant) price increases, while cedents with no recent loss activity are able to renew their reinsurance programs at relatively stable terms and conditions. Reinsurance renewals were particularly late, with some negotiations with cedents extending into the new year. The period highlighted the importance of having a platform with the ability to participate across the major (re)insurance markets.
Preliminary estimates show global insured catastrophe losses in 2019 of USD 56 bn, below the ten-year average of USD 75 bn and significantly below losses in both 2017 and 2018 (the highest two-year period of insured losses on record). The majority of catastrophes in 2019 were regional events with little impact on broader reinsurance markets. The exceptions were the back-to-back typhoons that hit Japan. Typhoon Faxai struck the Tokyo region in September, resulting in damage estimated at an industry loss of approximately USD 7 bn. Roughly one month after Faxai, Typhoon Hagibis hit the southeastern Honshu area of Japan, with estimates at an industry loss of USD 8 bn. This is the second year in a row of large typhoon events in Japan after Typhoon Jebi struck midway through Q3 2018. While the January 1 renewals do not include accounts in Japan, we expect to see a healthy increase in premiums during the upcoming Japanese renewal cycle on April 1, 2020. This is in addition to increases that were already witnessed during the 2019 Japanese renewals.
The typhoons that hit Japan (particularly Hagibis) had the most significant impact in the retrocession market in January 1, 2020, trapping additional capital and further reducing the supply in the already stressed retrocession market segment. New capital inflows did not match the level of losses plus trapped capital, which led to attractively priced transactions with rate increases for loss-affected accounts. Aggregate retrocession transactions2 saw the largest increases, as capacity for these transactions seems to have been particularly affected by loss fatigue over the last few years. Many cedents chose to increase retentions in order to keep their overall retrocession costs spend similar to prior years, which helped to increase margins on layers where we did choose to participate. In many instances, there were better terms and conditions achieved on contracts, especially those affected by events from previous years.
The stress witnessed in the retrocession market had a muted effect on property catastrophe reinsurance market renewals; however, many cedents that renew on January 1 have not ceded losses from recent catastrophic events. Rates in the US property catastrophe reinsurance market overall were flat to slightly up, depending on experience, while pricing in Europe was generally flat year over year. Cedents were able to fill out their programs with available capital in the market.
The catastrophe bond market was particularly busy at the end of the year, with USD 2.4 bn in property catastrophe bonds issued in Q4, bringing the total issuance of property catastrophe bonds in 2019 to USD 6.2 bn. Given these strong issuance figures, transactions were available in many geographic areas and across the risk/return spectrum. The strong issuance figures were partly driven by reinsurers seeking coverage from insurance-linked securities markets on an index basis. The high cost of indemnity coverage in the retrocession market was likely a factor in those cedents’ decisions. This trend looks set to continue, as more index-based retrocession catastrophe bonds are set to close in the first quarter of 2020. We expect the catastrophe bond market to continue to be active in the new year, given the large amount of transactions set to mature, which we believe in most cases will be renewed by sponsors.
Looking forward, we expect to see further rate increases in the property catastrophe reinsurance market, as the upcoming renewal cycles feature geographic areas that have been more impacted by recent events (Japanese renewals in April and mid-year US and Australian renewals). The ongoing bushfires in Australia have burned across an extremely large area, but their reinsurance impact will likely not be as significant as some previous fires, as the fires burned through large remote areas, with the majority of impacted towns having populations under 10,000. We also expect a strong issuance pipeline in the catastrophe bond market, with cedents continuing to look to capital markets as a core piece of their reinsurance program and reinsurers turning to the bond market for index covers given the high cost of coverage in the retrocession market.
Sources: Swiss Re, Artemis, Insurance Business Magazine, S&P Global