Stability and predictability marked the January 1 renewal period, a notable change from the previous year’s challenging conditions, as highlighted in the “1st View” renewal report by Gallagher Re.
The firm attributes this change largely to improvements in the property reinsurance sector. Twelve months prior, the market grappled with a volatile property reinsurance landscape, leading to delayed and stressful renewals. However, Gallagher Re’s CEO, Tom Wakefield, noted a significant rebound. He pointed out that the balance between property supply and demand has been restored.
“Returns for the first three quarters of 2023 exceeding reinsurers’ increased cost of capital, underpinned by the exceptional structural changes achieved last year,” Wakefield said. “Retained earnings, modest new capital raises, ample retrocession capacity and buoyant ILS markets combined to increase available catastrophe reinsurance limit, resulting in a much calmer renewal period.”
Wakefield also observed signs of over-placement in well-structured programs, indicating a potentially more favorable position for some buyers in 2024.
The report sheds light on various aspects of the market, including property, casualty, and specialty lines, as well as the burgeoning ILS market. A key observation is the lack of major US wind events in 2023, which positively influenced insurers’ and reinsurers’ outcomes.
Despite this, insured property catastrophe losses surpassed US$100 billion, with the US bearing the brunt of severe convective storm losses. The report also noted a divergence in pricing and coverage in personal and commercial lines, particularly in tightly regulated markets. This has led some buyers to explore alternative capital sources, such as catastrophe bonds.
As capacity pressure eases, many primary companies have successfully increased their tail cover purchases, particularly in the US. This demand has been met by the reinsurance market’s willingness to deploy capacity, especially in areas with low non-modelled peril activity. However, for frequency protections, reinsurance capacity remains constrained, pushing buyers towards structured buy-downs.
In the casualty sector, US casualty lines have lost their previous status as a valuable currency to support property catastrophe capacity. Concerns over loss inflation and rate adequacy, compounded by COVID-19’s economic impact, have diminished confidence in third-party liability lines.
The specialty lines market remains robust, with coverage challenges overshadowing pricing concerns. Geopolitical events like the conflicts in Gaza and Russia/Ukraine have kept war, political violence, and terrorism in the spotlight. The cyber market is witnessing a shift towards non-proportional instruments, with the ILS market beginning to back cyber bonds, followed by an increase in 144A bonds from various sponsors.
Finally, the ILS market saw record-breaking catastrophe bond issuance levels in both halves of 2023. This included the first-ever underwritten cyber catastrophe bonds and an unprecedented number of EU-based insurer-sponsored bonds. Gallagher Re anticipates a strong catastrophe bond pipeline for Q1 2024, with continued high issuance levels through at least Q2 2024, driven partly by relative value considerations.
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