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Price tussle: tough mid-year renewals loom for Australian market

The tone is set for Australian insurers as they get into the full swing of critical reinsurance renewal talks – and any hopes for an easing in price pressures have largely been dashed by the recently concluded April season.

Gallagher Re says the April renewals have seen a “continuation of the discipline” shown by reinsurers at January 1, but with a “greater determination” that pricing and contract improvements are applied across all territories and to all business lines.

“The January renewals did see some smaller territories being treated more favourably than major mature markets, but this differentiation has largely vanished by April,” Gallagher Re says in a report.

“Capital supply remained constrained with few signs of fresh capital entering the market and existing reinsurers being impacted by mark-to-market investment losses.

“The hopes of some buyers that new capacity might enter the market at this renewal – and some signs of amelioration in hardening terms and conditions would emerge – remain unfulfilled.”

Gallagher Re says the reinsurance market remains stressed as reinsurers seek to achieve reasonable returns on their capital whilst nursing “large” investment losses.

The report, 1st View: Undimmed Resolve, is Gallagher Re’s first look at current reinsurance market conditions since the start of the year. The Gallagher-owned global reinsurance broker issues similar reports three times annually at the key renewal seasons – January 1, April 1 and July 1.

Other industry players and analysts have also released their assessments of the April and January renewal seasons and reached similar conclusions. The April and January seasons, dominated by Japan and US/European buyers respectively, provide relatively accurate indications of what the Australian market can expect.

For Australian reinsurance buyers, who typically renew their programs at mid-year, this is shaping up as possibly their toughest renewal in years. Not that this comes as a surprise after the NSW/Queensland floods in February and March last year – now the country’s most costly insured natural catastrophe with losses of at least $5.81 billion – and other La Nina-linked floods that followed.

They have entered the mid-year renewal season knowing reinsurance prices are headed north but are they prepared for the extent of the increase that is potentially in store, especially for catastrophe protection?

Moody’s Investors Service says in an in-depth sector update that property catastrophe reinsurance pricing could rise further although it did not provide any estimates.

It says weak sector profitability in recent years from above average catastrophe losses, inflationary pressures, a focus on the impact of climate change on catastrophe event frequency and tight supply conditions in the collateralised retrocessional market “all point to higher pricing in the months ahead”.

Broker Aon says attention is now on mid-year property catastrophe renewals in the Asia Pacific, in particular Australia and New Zealand, which have both experienced unusually large catastrophe events since the last renewal.

“Although challenging, we anticipate capacity available at a price at the mid-year renewal for the APAC region.”

The Aon Reinsurance Market Dynamics Report for April says the broker was able to place property catastrophe limits, albeit at a price and with higher retentions.

“With mid-year renewal negotiations now underway, the demand-supply balance is delicately poised, yet we are optimistic that the market is now on a more stable footing following a turbulent 1/1,” the report says.

But the optimism comes with caveats. Aon says the April renewals showed “reinsurers are prepared to readily deploy capacity at the right terms” and they had “very limited appetite for aggregate catastrophe coverage”.

“The re-pricing of catastrophe risks seen at 1/1 continued at April 1… and informed insurers anticipated the retention and price adjustments necessary to achieve their desired placement outcome, Aon says.

Swiss Re, a major reinsurance provider in the Australian market, said in February it achieved a price increase of 18% globally at the January renewal round, with improved rates in all lines of business.

It has not yet provided an update for April but said in a recent report, released last month by its Swiss Re Institute, that the hard reinsurance market is expected to continue due to increased demand for coverage.

Another driver is inflation pressure, which has pushed up values of insured assets, the Sigma report says. At the same time catastrophe claims payouts have reduced the supply of reinsurance capital.

“Adding to capacity shortages, six years of weak results in property underwriting have reduced risk appetite,” the report says.

“In our view, as higher exposures encounter shrinking risk appetite, momentum for rising prices, higher retentions and tighter terms and conditions will likely continue.”

Come mid-year, we will know just how tough the renewals have been for the Australian market – and the likely impact on insurers and their customers.