Despite the hardening market over the last 12 months, the global outbreak of COVID-19 and slightly less capacity deployed by insurance-linked securities, 1 April 2020 reinsurance renewals saw reinsurers being measured in their approach.
The April reinsurance renewals, which largely involve the Japanese reinsurance renewals and some more in the US, saw significant rate increases on loss-affected accounts and more modest rises on loss-free business.
According to the latest renewals report by Willis Re, the global reinsurance sector has smoothly moved on to the new work-from-home model following the COVID-19 outbreak and has been able to function without interruption. The assessment of the financial impact of the pandemic on the reinsurance sector will, however, take time.
Momentum is building
The report said following the gradual hardening over the past 12 months, reinsurers approached the 1 April renewal season looking to build on the rating increase momentum, which up to this point had continued to be outpaced by the primary market.
Also, with the capital strength of the traditional reinsurance industry showing a significant increase as a result of improved 2019 results and only modest reductions in insurance-linked securities (ILS) capacity, primary insurance company buyers were confident that enough capacity would be available to meet their needs, even for those looking to buy more limit, subject to acceptable terms and conditions for both parties.
With this view and drawing on the lessons from the 1 January 2020 renewal season, most buyers started their renewal negotiations well in advance. This organised approach proved to be prophetic in light of the COVID-19 outbreak, which started to challenge the operational model of the market in the last two weeks of March.
Willis Re global chief executive James Kent said, “Reinsurance policies that were drawn up well in advance of the due date have been completed without any COVID-19-specific exclusionary language. For those programmes that were not completed well in advance, several reinsurers sought to impose COVID-19 exclusions.”
Mr Kent said, “Having demonstrated its ability to manage the operational challenges of COVID-19 so far, the global reinsurance industry is well placed to demonstrate its ability to manage the longer-term financial challenge and continue with its mission of providing support to primary insurance companies and their policyholders.”
He said the timing of the COVID-19 disruption fortunately coincided with the global reinsurance market being in a strong financial position supported by strict regulation.
The report said, “The largest risk-adjusted property price increases were seen on loss-hit catastrophe treaty contracts, which were up +30% to +50% for Japanese wind exposures. Loss-free treaties saw less dramatic rises and, in a handful of cases, renewed as expiring.”
Analysing the renewal season, the report said, “Several buyers sought additional natural catastrophe capacity, some seeking more vertical protection and others looking to buy out coinsurance participations. For the most part, traditional reinsurers were able to offer increased capacity along with some ILS funds.”
“There were, however, examples of some ILS funds reducing their offered capacity at 1 April with the message that there had been recent redemptions by investors.”
“The 2020 casualty renewals were again under scrutiny in terms of loss development and for the Japan renewals, the inclusion of difficult risks such as pharmaceutical products liability. Specialty classes with losses also saw reinsurers pushing hard on pricing, with some substantial risk-adjusted movements. The aviation market saw price increases in excess of 20% for the first time in nearly two decades.”
Tough in Japan
Japan was hit by several storms in 2019, including typhoon Hagibis and typhoon Faxai and suffered insured losses over $17bn.
Reinsurers’ response to the COVID-19 pandemic was impacted by timing and underlying coverage considerations. Early firm orders were completed without specific exclusionary language. In other cases, several reinsurers sought exclusions.
Cedents renewing in the US saw rate increases of 10% to 30% for loss-hit catastrophe accounts and flat to 10% increases for loss-free accounts.
Referring to US renewals, the report said, “Some reinsurers only authorised capacity with COVID-19 or communicable disease exclusions in place; however, this is by no means universally accepted and depends on the scope of the underlying business.” A