We are proud to share Hard Times, an expansive report on the insurance and reinsurance market and 1 January 2021 renewals.
Lower investment yields, higher loss cost trends, another above-average loss year, concerns over climate change and general risk aversion have coalesced to bring about some of the sharpest price changes in recent memory. Rates accelerated across most commercial lines in 2020, despite businesses facing significant, even existential, financial pressures due to COVID-19.
Balance sheets remain generally strong, with the sector continuing to attract substantial new investment capital. Confronted with this backdrop, reinsurers were mostly disciplined and discerning at 1 January 2021 reinsurance renewals, portending similar discipline in the near-term.
Our report offers a detailed retrospective and forward-looking analysis on a period of transformational change (and challenge) for clients and markets alike, as well as providing detailed insights into renewals.
Key findings on reinsurance renewals include:
- Howden’s Global Risk-Adjusted Property-Catastrophe Rate-on-Line Index rose by 6% at 1 January 2021. This was higher than the flat outcome of 2020, and the biggest year-over-year increase in over a decade. COVID-19 loss experience, along with yet another hyperactive natural catastrophe year, were key inflating drivers.
- Programmes in North America led the charge at 1 January 2021, with an average rate-on-line increase of 8.5%. Pricing pressure was more subdued outside the United States.
- A significant turning point was reached in Europe: the almost habitual experience of flat-to-down renewals relented in 2021, with rate rises in the low-to-mid-single digit range.
- Another year of constrained capacity in the retrocession market saw Howden’s Risk-Adjusted Nonmarine Retrocession Catastrophe Rate-on-Line Index rise by 13%. Four consecutive years of price increases have seen the cost of retrocession protection return to levels last recorded in 2012/13.
- Casualty reinsurance rates-on-line, including adjustments for exposure changes and ceding commissions, rose by 6% on average at 1 January 2021.
- Rising rates on underlying business, especially in the U.S., mitigated pressure on ceding commissions somewhat, although outcomes varied depending on book performance. Reinsurers were resolute in pursuing higher pricing for excess-of-loss programmes, although there was again some degree of differentiation to account for portfolio characteristics and profitability.
David Flandro, Managing Director, HX Analytics comments: “A multitude of factors informed this year’s (re)insurance renewals. Despite the asset shock that occurred immediately post-lockdown and full-year underwriting losses of USD 100 billion or more, capitalisation has proved resilient. Incumbents and new players raised close to USD 20 billion of capital in 2020 for all purposes, with more to come this year. This is therefore not a universally dislocated market; differentiated risk management strategies and advice can still unlock access to capacity, even if the landscape has undeniably become more challenging.”
2020 was historic by any measure. The lives of billions of people have been redefined by COVID-19, a global health crisis that brought with it shutdowns, financial market turbulence, economic dislocation and civil unrest. The pandemic is a reminder that certain perils do not conform to long-held assumptions around correlations, boundaries and duration.
The manifestation of systemic risks emerged elsewhere too. The effects of climate change were again in focus, as the frequency of extreme weather events pushed the boundaries of historical precedent. The increasingly complex risk landscape has exacerbated risk aversion in the insurance and reinsurance market, with carriers’ appetites responding accordingly.
José Manuel González, CEO, Howden Broking Group said: “Whilst the pricing environment may be supportive for carriers in 2021, this should not translate into a degree of risk aversion where underwriters accept rate but shy away from new risks or new business. The global risk landscape is changing like never before. Carriers and brokers have always served clients best by learning from shock events and 2020 is surely a year rich in its lessons. There is much to draw from: COVID-19 has brought the growing ‘intangibility’ of risk into focus, a trend that is only going to accelerate as new technologies continue to redefine risk characteristics. Irrespective of what happens to the market cycle in 2021, the (re)insurance market must seize the opportunity and focus on doing what it has done so well several times over; innovate and develop creative solutions for the changing needs of our clients.”
Looking ahead to 2021, hopes rest firmly on a successful vaccine rollout to limit the already considerable economic damage. The resumption of economic growth must be facilitated and supported through better risk transfer solutions.
COVID losses: The difference in COVID-19 loss projections is considerable, ranging from something approaching the largest loss ever for the private (re)insurance market to an event more akin to a moderate hurricane loss. Which scenario most accurately depicts reality will become clearer this year. Whilst capacity and risk appetite will be shaped by the answer, (re)insurers are strongly positioned to trade through and, whatever the outcome, will benefit as COVID-19 uncertainty recedes.
Market cycle: The duration of market discipline, and whether buyers can expect a prolonged period of price rises will be among the most contested topics of 2021. Whilst the catalysts for market hardening appear structural rather than cyclical, the insurance sector overall confronts these challenges from a position of strength.
Capital: Howden’s estimate of global insurance capital reached record levels in 2020, and is expected to remain broadly stable this year and next when it should support strong premium
growth. The sector is also attracting substantial amounts of new capital, comparable to levels generated in 2001 and 2005, with more expected to come this year.
Profitability: Despite serious headwinds, most carriers remained profitable in 2020, with the HX insurance composite reporting USD 10 billion of net income in the first nine months of
the year.
