Reinsurers demand higher renewal rates as floods in focus

Reinsurers have sought significant rate increases at the Australian June and July renewals as the market responds to the high level of local and global natural catastrophes and a changing economic environment, international broking groups say.

“The June and July renewals were a market-changing event for Australia,” Aon says in a report. “The market is at the start of a period of adjustment, as both insurers and reinsurers adapt to the prospect of higher frequency secondary perils and the uncertainties of climate change.”

Around 70% of Australia’s insurance market renews during June and July, with the focus mainly on property catastrophe reinsurance.

Aon says many reinsurers were “not willing to attach to lower catastrophe layers, at any price” and the market pushed for higher retentions and sought to minimise over-exposure to a frequency of events.

Secondary perils, such as flood, were a particular issue for insurers and reinsurers, given the high level of claims from the catastrophe earlier this year and previous events.

“Clients were able to mitigate market challenges by using data and modelling to present a realistic view of risk to reinsurers, differentiating themselves in the market and building capacity,” Aon says.

“Challenges in sourcing traditional indemnity reinsurance cover at the lower end of catastrophe programs in the Australian market is expected to drive interest in alternative capital and parametric solutions, as well as the need for further investment in climate science and modelling of secondary perils.”

Aon says the new government-backed reinsurance pool was not a factor this year, but is likely to influence future reinsurance renewals by reducing certain peak risks, although it will not address the frequency issue of secondary perils.

The broker’s Reinsurance Market Dynamics report says globally reinsurance buyers faced a near-perfect storm in June and July as capacity constraints collided with rising demand.

According to Aon data, reinsurer capital decreased to $US645 billion ($946 billion) at March 31 from $US675 billion ($990 million) at December 31. Within that total, alternative capital increased to $97 billion ($142 billion).

Gallagher Re says Australia faced a “much later and tougher renewal” than normal, with reinsurers seeking additional information on the impact of flood losses and on the impact of inflation on portfolios.

“Following the recent flood losses, reinsurers were less inclined to support lower cat layers or cat layers perceived to be exposed to frequency losses, leading to increased retentions for some buyers,” it says in a Frist View report titling “Changing Environment”.

“Limited enthusiasm from reinsurers for aggregate protections saw many buyers either paying more or non-renewing historical layers.”

There was a wide variance in quotations received from reinsurers and long-term relationships were tested with some reinsurers walking away where pricing was considered inadequate, Gallagher Re says.

“Pricing ultimately became more commercial than technical, with a keen focus on key relationships to try and reach compromises satisfying both parties,” it says.

Rate rises for Australia catastrophe-hit property were 15-25% it says, and were 5-10% for catastrophe loss free property.

Gallagher Re says globally numerous external economic and political factors that were less prominent at the start of the year, such as inflation, have come more to the fore.

“Primary companies in previously low inflation economies are having to adapt their pricing and underwriting processes to the new reality; with reinsurers applying an extremely detailed analysis of the actions that companies are taking,” Gallagher Re Global CEO James Kent says.

Mr Kent says a cocktail of competing factors is affecting reinsurers appetite for volatility with the consequent reshaping of their portfolios away from catastrophe lines.

“Despite these difficulties nearly all buyers were able to secure cover, albeit at an increased cost in many cases and sometimes not at the levels of attachment they were seeking,” he said.

Gallagher Re says there are currently limited signs of new capital entering the reinsurance market to offset the firming trend, and despite reporting satisfactory first half results, reinsurers appear to be more sensitive to losses and wider external events than at any time since 2008.