Following 2022’s hardening reinsurance market, the January 2023 renewals show these conditions are continuing. The risk-adjusted global property catastrophe reinsurance rates on line (RoLs) increased on average by 37% on January 1, 2023 – the largest yearly increase since Hurricane Andrew in 1992 and above the 9% increase at the start of 2022, according to Howden. The CAT market is experiencing rising rates, tighter terms, and difficulties around sufficient capacity.1
As the reinsurance market experiences some of the largest rate increases in over 30 years, capacity continues to be constrained across many lines. The price increases are driven by macroeconomic challenges, geopolitical concerns, and claims losses that the market had in 2022. A convergence of geopolitical and macroeconomic shocks – including war in Ukraine, volatile energy markets, record high inflation, interest rate hikes, natural catastrophe events like Hurricane Ian, and depleted capital led to “highly challenged and complex” reinsurance renewal cycle in January 2023.2 The large decrease in available retrocession cover, which reinsurers purchase to transfer some of their risk, is also contributing to constraints and price pressure.
Costlier Reinsurance is Impacting Commercial Rates
The shifts in the reinsurance market, with supply decreasing as reinsurers cut their property-catastrophe and other exposures, are driving higher pricing and increased constraints for buyers. There’s also increased demand as reinsurance buyers want coverage for more premium and higher insured values in the market.3 According to Gallagher Re, the two areas with most constraint were peak-zone U.S. property catastrophe capacity and coverage for strikes, riots & civil commotion and war. Outside of these areas, insurers were able to attain capacity, but they often had to pay more and accept tighter terms and conditions.4
Reinsurers are passing on the higher rates and more challenging terms and conditions onto the insurance companies ceding risks to reinsurers (cedents). They are also being more cautious about covering certain lines. In property-catastrophe contracts, reinsurers are giving clients more restrictive terms and structures that may limit their exposure to losses. They also want to push the possible trigger point for reinsurance payouts upward, putting more risk on the cedent.5
The increase in reinsurance rates is pressuring commercial insurers to raise their rates further, even as commercial insurers are already raising rates to account for inflation, higher costs, greater numbers of claims, and lower returns from their investment portfolios. In turn, insurance brokers may have a harder time getting well priced coverage for their clients. Furthermore, brokers’ clients may face more restrictive terms and conditions. However, these challenges may be an opportunity for brokers who are market experts with deeper knowledge about the difficult markets to place.
There’s an Opportunity for Specialty Brokers
As rates continue to increase, some insureds will value the ability to place risk with a firm that has greater expertise around highly specialized or niche risks that may be harder to place with generalists. The hard reinsurance market will likely continue to be one of the drivers of higher premiums for certain segments of commercial and property insurance.
In this challenging environment, customers are looking for more than just a broker who can complete an insurance purchase. They are demanding a knowledgeable advisor who provides solutions. This shift in customer preference has accelerated the need of firms to gain access to specialty insurance capabilities: unique solutions and sophisticated value-added services, creating new opportunities for specialty brokers to expand their markets.
Furthermore, as reinsurance markets continue to limit coverage and narrow coverage for certain property risks, insurance brokers should consider accessing more specialty markets to help retain clients if an existing carrier cannot meet pricing and terms needed by the client. Alternatively, we encourage insurance brokers to consider partnering with other brokers (either through a sale or merger) to access specialty markets that the client cannot source.
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