Behind the upcoming hard market in global reinsurance

Globally, insurance companies’ premiums are on the rise.

Inflation and wartime sanctions are cited as two (among other) major factors in why global reinsurers are sliding into a harder market status as of recent July 1, 2022, renewals, according to Arthur J. Gallagher Re.

“[At] the last major renewal season of 2022, there were noticeable signs of a hardening in reinsurers’ attitudes,” James Kent, global CEO of Gallagher Re wrote in the latest publication of Gallagher’s 1st View: Changing Environment. “Numerous external economic and political factors that were less prominent at the start of the year have come more to the fore and started to make their presence felt in the global reinsurance market.

“The first and most widely reported is inflation.”

Gallagher notes the global insurance and reinsurance industry “is well used to managing high inflation rates” in emerging markets, but for the first time since the late 1970s and 1980s, major mature economies are experiencing high rates of inflation.

“Primary [insurance] companies in previously low-inflation economies are having to adapt their pricing and underwriting processes to the new reality,” Kent observes in his commentary, “with reinsurers applying an extremely detailed analysis of the actions that companies are taking.

“The result of this has been technical discussions between [insurance company] buyers and reinsurers on the inflation loadings to be applied to specific treaties over and above movements in exposure.”

Or, as the Gallagher report summarizes elsewhere, “reinsurers were seeking client-by-client explanations in relation to the management of this risk in reinsurance placements. Clarification was being sought regardless of the indexation mechanisms that are contained in most international excess of loss reinsurance placements.”

Gallagher notes reinsurance rates varied widely this year based on whether or not insurers’ portfolios saw emerging losses. (Gallagher’s report does not identify specifically Canadian numbers.)

For example, in the United States, if a Florida insurance company’s books had not been hit by property losses over the past year, their reinsurance rates saw an average increase of 15% to 35%. If their property portfolio did sustain losses, that reinsurance rate increase shot up to 20% to 50%.

In casualty insurance, which includes long-tail liability losses affected by inflation, international casualty insurers saw their excess-of-loss reinsurance rates go up by zero to 7.5%, assuming no losses in the portfolio. With losses, their excess-of-loss reinsurance premiums saw increases of between 7.5% and 15%. (In excess-of-loss reinsurance, the reinsurer indemnifies the ceding primary insurance company for losses that exceed a specified limit).

Inflation is not the only headache manifesting itself for global reinsurers. So too are the costs of maintaining global economic sanctions against Russia for invading Ukraine. (What Russia refers to as a “special military operation.”)

“With the ongoing war in Ukraine, we have seen reinsurers focus on the sanctions clauses [in insurance contracts], making sure that all possible jurisdictions were included within clauses. This has also highlighted many of the differences approach in relation to sanctions in different territories.

“Buyers have needed to consider in more detail the exposures in their business and their overseas exposures. All reinsurers are scrutinizing the exposures that are within reinsurance placements in much greater detail as well as historical performance. There has been a lot of signaling in relation to future price corrections.”

Feature photo courtesy of istock.com/Svetl