1/1 renewals: Inflation means uncertainty for reinsurance pricing
With January renewal period approaching, reinsurers express concern over the effects of inflation and other market conditions going into 2023.
Maya Sibulposted on Monday, December 19, 2022
On 1 January, 2023, reinsurers are set to go through a global process known as 1/1 renewals – in which contracts are renewed between insurers and reinsurers, which means possible pricing increases and renegotiation of terms.
This year, reinsurers face added stress due to inflation and other market conditions.
This means that some organisations might seek to lessen their exposure to catastrophic risk, betting instead on safer options like government-backed securities. Portfolio differentiation and diversification will also be a key focus given the evolving markets – and capital into alternatives and emerging markets could also be a noticeable trend.
Heading into January, eyes are glued to a few key issues, as the reinsurance market sees uncertainties ahead.
Volatility due to inflation
Recent increased frequency of extreme weather events has also caused reinsurers to reassess their appetites for risk, which has potentially created a mismatch in supply and demand, said an Aon analysis of the coming year’s renewals.
“We are anticipating recessionary conditions, but I would still be hopeful. It’s about the duration and severity of the recession.”
Nick Hankin, Chief Underwriting Officer at QBE Insurance, said that he hopes inflation is currently at its peak – and will ultimately be a moderate disruption moving forward. “Yes, we are anticipating recessionary conditions, but I would still be hopeful,” he said.
“It’s about the duration and severity of the recession; we can manage our way through it and help our customers through it too.”
Hankin added that he anticipates high prices going into the new year, which means insurers and reinsurers will have to plan wisely and think ahead – especially when it comes to pricing. “We expect it to reflect the high wind,” he said. “We are focusing on strong momentum and discipline, and we’ve quite conservatively managed things despite inflation.”
“Insurers that take a flexible approach should yield materially better results this renewal.”
Industry giant Hannover Re also noted that “for the treaty renewals as at 1 January 2023 [we] expect further price increases and improvements in conditions, not only in loss-affected lines and regions.”
Hopes for resilience despite uncertainty
Nonetheless, are still positives. For one, “reinsurance remains a highly accretive source of capital for the insurance industry and one that is rightfully in high demand”, the Aon report said. “Insurers that take a flexible approach should yield materially better results this renewal.”
According to the same report, resilience in 2023 means anticipating market dynamics, exploring new sources of capital, and using analytics to tell a granular story. It also means identifying and capitalising on growth opportunities.
One such highlighted area was the emerging market for intellectual property insurance – which is predicted to “one day surpass the mortgage reinsurance market”.
Casualty and specialty insurance markets are also expected to remain attractive in the near future.
Focus on bonds and alternatives
Because of a reported decline in equity investments – seen as less stable than other vehicles such as funds and fixed income, for example – alternative capital is poised to leap ahead, with the catastrophe bond market set for another year of growth.
“Alternatives have become a vital part of insurance companies’ investment strategy.”
A recent Mercer study called “Top considerations for insurers in 2023” noted that 2023 will likely see continued growth in the alternatives market. “Sustained growth in [alternatives] is unsurprising coming off the back of a decade of low-interest rates and the creation of more capital-efficient structures for US insurers,” said the report. “As a result, Alternatives have become a vital part of insurance companies’ investment strategy.”
Within alternatives, private debt was the most frequently utilised asset class for insurers, the report added. “One key trend we expect to grow over the coming years is the use of evergreen funds within private debt, allowing clients to maintain their exposure more efficiently than the usual commitment cycle.” Not only do these structures allow for more stable exposure, but they could also offer lower fees.
“Insurers that are tempted to continue relying on conventional fixed income assets in uncertain times might instead need to recognise the likely benefits of diversification.”
This means that a “business as usual” mindset could be an ill-advised course of action, said Charles Moussier, Head of EMEA Insurance Client Solutions at Invesco, and Elizabeth Gillam, Head of EU Government Relations & Public Policy at Invesco in a recent analysis piece for Insurance Investor.
“Insurers that are tempted to continue relying on conventional fixed income assets in uncertain times might instead need to recognise the likely benefits of diversification,” they wrote.
This will be the case as reinsurers and insurers cross the 1/1 renewals threshold and move into 2023.