July Renewals See Attachment Levels & Costs Rise: Gallagher Re

According to Gallagher Re's 1st View report, almost all buyers of protection were able to secure their reinsurance coverage at a July 1st, 2022, renewals shaped by economic factors that helped to sustain market hardening.

Source: Reinsurance News | Published on July 1, 2022

Gallagher Re on January property renewals

Following the June 1st reinsurance renewals, all eyes turned to the later mid-year renewals in July, due to a decrease in reinsurer appetite for natural catastrophe risk and a combination of macroeconomic factors.

However, while nearly all buyers were able to secure coverage (implying that some could not fill programs), Gallagher Re notes that in many cases, both attachment levels and reinsurance costs were higher than buyers desired. Furthermore, according to the broker, limited supply in some lines and territories caused stresses not seen in many years.

In its 1st View renewals report, global reinsurance broker Gallagher Re says, "Overall, the reinsurance market's firming trend continued."

Numerous economic factors, including the impact of inflation and rising interest rates on reinsurers' balance sheets and reserves, as well as concerns that a recessionary environment would lead to higher claims frequency, helped to sustain the hardening trend, according to the firm. These factors, combined with sustained loss levels, allowed reinsurance companies to maintain upward pressure on rates at renewals.

As in June, reinsurers' reduced appetite for nat cat exposures impacted property catastrophe renewals at 1/7. This ongoing trend, combined with losses (particularly in Australia), has pushed property cat reinsurance rates up across the board.

However, Gallagher Re notes that some Florida and Australian placements showed signs of pricing distress.

The impact of inflation on underlying portfolios and reinsurer exposures was scrutinized more closely at renewals across all lines of business, with sellers looking to explicitly apply additional inflation loadings if buyers of protection could not demonstrate their own original pricing actions to manage the current trend.

Away from the stressed property market, Gallagher Re notes that long-tail casualty placements remained largely popular with reinsurance companies, despite the ceding commissions debate intensifying as reinsurers' concerns about higher inflation rates and their impact on claim awards grew.

The reinsurance broker observes similar conditions to traditional renewals in the insurance-linked securities (ILS) markets, with increasingly selective investors reducing available capacity to some buyers. As a result, the cost of risk transfer via ILS has risen.

Yields and spreads in the ILS space have been rising in 2022, attracting new investors to the asset class. According to Gallagher Re, this has yet to reverse the overall pricing trend.

Given Russia's ongoing invasion of Ukraine, it's not surprising that political and social factors played a role in mid-year renewals. The conflict in Ukraine has focused attention on cyber and war contract provisions. At the same time, Gallagher Re claims that progress toward improved ESG protocols has piqued the interest of cedent and reinsurer stakeholders worldwide.

"Reinsurers are more sensitive to losses and wider external events than they have been since 2008," said James Kent, Global Chief Executive Officer of Gallagher Re. The inflation discussions have been detailed and technical, with reinsurers eager to challenge cedants' model outputs. Most reinsurers are assessing reserve adequacy as interest rates rise, in addition to their concerns about primary rate adequacy in the new inflationary environment. They are being impacted on both the asset and liability sides at the same time, which has strengthened their resolve to maintain the price momentum of the previous two years.

"However, in classes and territories where capacity is limited, commercial considerations have sometimes trumped technical pricing." Relationships are crucial, and competition, while subdued, is still present.

"Within those renewal dynamics, reinsurance buyers were able to obtain the majority of the coverage they desired, if not at the prices they desired."