October 15, 2020 by Greg Meckbach, Associate Editor
The reinsurance market is hardening, but by how much rates will go up in the January 2021 renewal season is anyone’s guess. Several ‘X-factors’ include the final tally of damage caused by the 2020 hurricane season, the level of risk exposure in the primary carriers’ books of business, and what kind of reinsurance contracts the primary insurers have.
“With the Jan. 1, 2021 renewals, there could be some rate increases, likely 5% to 15%, not just in Canada, but in the global reinsurance market,” Matt Wolfe, president of reinsurance solutions in Canada for Aon, says in an interview. “There are definitely segments in the reinsurance market that are quite firm and they have seen significant price increases.”
If primary insurers have to pay more for reinsurance, they will likely pass some of that cost on to their clients, says Marcos Alvarez, Toronto-based senior vice president and head of insurance at DBRS Morningstar.
“You could see reinsurance prices causing further hardening on the primary side,” says Geoffrey Lubert, CEO of Willis Re Canada. “But the primary insurance market was definitely already hardening, independent of reinsurance. Now we are seeing reinsurance catch up.”
Ray Thomson, director of New Jersey-based A.M. Best Company Inc., says the ratings agency is indeed looking at a generally hardening market in reinsurance. “It has been an active catastrophe season in Canada thus far. There was a huge hail storm in Alberta and even Tropical Storm Isaias reached up into Quebec and the Maritimes. With all that activity, there could be some expectation of more price increases.”
For Bermuda-based Axis Capital Holdings Ltd., gross written premiums in reinsurance were up 9% for the first six months of the year, from US$1.82 billion in 2019 to US$1.978 billion in 2020.
“For the June 1  renewals, we saw the best [reinsurance] market conditions in more than 10 years, with tightening terms and conditions, in addition to higher pricing,” Axis CEO Albert Benchimol said in July during an earnings call. “This year, we are seeing firming conditions across substantially all of our lines of business.”
Primary insurers will see “up to double-digit rate rises” in their reinsurance rates this January across many of the lines of business, said Brian Schneider, Chicago-based head of reinsurance at Fitch Ratings.
“We did not see that last January. We have seen it in April and June thus far, so we think that January should continue the trend we have seen thus far this year,” Schneider says in an interview.
For Lubert, it would be difficult to guess exactly what reinsurance changes the property and casualty industry could see when it comes time to renew in January. “Rate changes are going to be specific to the client and line of business,” he said. “I don’t think reinsurers will underwrite with an across-the-market approach. You are not going to see all clients getting X amount of rate increase. You are definitely going to see individual clients rated according to their own underwriting approach, loss history and exposures.”
And don’t assume reinsurers will raise rates for all primary insurers. With this coming January renewal season, some reinsurers can still get more revenue on the same amount of business, even if they do not raise their rates, Wolfe explains.
“If the primary insurer has already raised its rates, then the reinsurer is getting more rate for the same exposures than it had a year ago. So the reinsurer is calculating the rate off that new premium base,” he says. “So when primary insurers raise their rates, that ultimately lifts the boat of the reinsurers’ results, especially if it’s on a quota share basis. It is also true, but less direct, if it is on an excess of loss basis.”
Even if the primary carriers do raise their rates, sources say, this does not necessarily mean that for every extra dollar the primary insurer spends on reinsurance, the primary insurer will increase its premiums by a dollar.
“It depends in part on how the primary companies place their reinsurance,” Alvarez explains. “If it is proportional, you can probably expect that these price increases will pass linearly to the customer, but if [primary insurers] have excess-of-loss type of reinsurance arrangements, the pricing is a bit trickier. What we see in Canada is most of the P&C carriers have a strategy of non-proportional reinsurance — for example, buying reinsurance on an excess of loss basis.”
In early September, experts told Canadian Underwriter that the outcome of the January 2021 reinsurance renewal season will depend in large part on how the hurricane season develops during the remainder of the fall.
At the time of writing, Hurricane Sally had made landfall on the Gulf of Mexico coast near Mobile, Ala., causing record floods with wind speeds of more than 160 km/h. On Sept. 16, the U.S. National Hurricane Center issued flood warnings for Alabama, Florida, Georgia, the Carolinas and Virginia.
AIR Worldwide estimated that Hurricane Laura, which made landfall Aug. 27 near the Louisiana-Texas border, cost the industry up to US$8 billion.
“If we get a couple of large hurricanes, that is going to have an impact on reinsurance pricing,” Lubert told Canadian Underwriter the week before Sally made landfall. “It would pretty much shut the retrocession market down, which would have an impact on the reinsurance supply.” Retrocessional cover is what reinsurers buy to reinsure themselves.
“When reinsurance contracts are renewed on Jan. 1, we might see increases in the high single digits in some lines,” Alvarez said before Hurricane Sally. “This depends a lot on how the hurricane season develops from now until November. You never know if are going to get hit by another hurricane in the season.”
Wolfe sees some market factors that would normally lead to reinsurance rate increases. These include poor investment income, the risk of insured losses arising from COVID-19, and Cat activity. “Due to low interest rates, the investment returns, for a number of years, have not been enough to subsidize the underwriting results,” Wolfe says. “Over the last few years, reinsurers have had to get more disciplined on the underwriting side.”
Global reinsurers experienced higher combined ratios during the first half of this year than in the first six months of 2019, DBRS Morningstar said in a report released Sept. 2. The average combined ratio for 13 large reinsurers was 103.7% in the six months ending June 30, 2020, a 10.9-point deterioration from 92.8% in the first half of 2019.
“Investors were sick of losing money,” Lubert says. “The insurance and reinsurance sectors have not been overly profitable for a while.”
Moreover, weather catastrophes are costing Canadian insurers.
“There has been significant Cat activity in Canada over the last 10 years, including the southern Alberta and Toronto area floods in 2013 and the Fort McMurray wildfire in 2016,” Wolfe says. “If we look at the 10-year window, I think the reinsurers covering Canadian catastrophes are doing okay, but that is something to keep an eye on.”
Worldwide, there have been significant concerns around insured losses from COVID-19. “The estimates range wildly,” Wolfe says. “Regarding the industry-wide insured losses arising from COVID, we don’t know yet what that number will be, but it will not be insignificant.”
And so, COVID-19 could also affect the January reinsurance renewals.
“A primary insurer could do one of two things to minimize its rate increases,” Wolfe says. “It may be able to demonstrate that it does not have material COVID exposures, given the type of business it writes. Or, if it does have material COVID exposure, it could demonstrate that it is taking very proactive steps in terms of limiting its exposure through the use of exclusions or reducing capacity.”
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