What do January reinsurance renewals have in store for property insurers?

With January’s reinsurance renewal period quickly approaching, the impact of major cat events on property insurers remains to be seen, said a new report from Navacord brokerage Lloyd Sadd. 

Catastrophic losses are making leading property insurers selective about the amount of capacity they’ll deploy on any one risk, and on which risks they’ll deploy that capacity. But, these corrective actions have seen many insurers return their property portfolios to profitability, Sadd said in its November marketplace insights report.

Insurers have begun to moderate their demands for ‘hefty’ mandatory rate increases on all renewals, the report added, and customers can expect to see rate increases ranging from flat to only low single digits. 

What’s more, a number of insurers who gained market share following Lloyd’s retreat during the hard market have begun offering competitive terms on certain classes of business. “Customers with larger risks that are in good financial shape, have few to no losses and strong risk management protocols in place may find opportunities in the current market,” the report said. 

However, the impact of January 1 reinsurance treaty renewals remains uncertain for property insurers. 

Large catastrophic losses such as hurricanes Fiona and Ian meant reinsurers paid out heavy losses to insurance companies. 

For example, Fiona is estimated to have caused approximately $660 million in insured damages across Atlantic Canada. Plus, Hurricane Ian caused an estimated US$50-US$70 billion in insured damages, and has led to a ripple of pricing and capacity tightening across the primary and reinsurance market. 

Insured losses from these events caused reinsurers to raise new capital though increased reinsurance premiums. “It remains to be seen how the interplay between increased reinsurance costs for primary insurers and their desire to retain and increase market share and grow top line revenue will play out in 2023,” the report read. 

But reinsurance renewals aren’t the only factor for property insurers. The impact of inflation on capacity and rate in the property segment is also top of mind. 

“The holiday from rate increases customers may enjoy at the moment is effectively wiped away by inflation adjustments to premiums dictated by increases to valuations of assets at the current rate of inflation,” the report said. 

Over the past year, the cost of building materials and labour has risen exponentially, which creates concerns for insurers since many assets are no longer insured to their correct values and could leave customers underinsured in a total loss event. 

Insurers normally apply an annual increase, in the range of 3% to 5%, to account for inflation at renewal. 

But inflation’s risen so sharply that annual guidance documents underwriters use to apply appropriate inflation adjustments for different classes of risks are already out of date, said Sadd. Insurers are now applying increases ranging from 4% to 8%, and in some cases higher. 

“[Insurers] continue to worry that even these are not enough to keep up with current real rate of inflation (currently sitting just below 7% in October, down from above 8% in the summer).” 

Closely related to the inflation issue are ongoing supply chain problems, which add significant amounts of time to obtaining construction materials, replacement parts and components. “These delays have significant implications for determining appropriate periods of business interruption coverage (i.e., beyond one year), especially for revenue generating assets.” 

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