In recent years, the reinsurance marketplace started making headlines in the industry due to sharp increases in reinsurance costs, which peaked in November and December of 2022.
Unusually high frequency and high severity of natural catastrophes coupled with equity and bond market volatility through the first half of 2022 resulted in significant increase in demand at a time when the capital supply was coming down. Inflation remained high at the end of the year, and the impact of social inflation added to the emerging “price storm,” making reinsurance practically unaffordable in January 2023. Overall pricing was up from 45-55% across the market with much less excess capacity than the industry had seen in the recent past. Those variables changed so quickly, and ultimately, insurers decided to buy less reinsurance and retain more risk instead of laying it off.
As 2023 progressed, the situation has improved slightly. Pricing increases started to moderate as supply started to go up. Even though 2023 has been a very active catastrophe year in the United States, most of that activity resulted in smaller frequency type losses. Consequently, those smaller type events were not finding their way to the reinsurers and were being retained by the primary insurance companies. This phenomenon has been easing the hypermarket dynamic experienced early in the year.
Where are we today?
Catastrophic losses are still high but not severe, inflation is cooling, and capital is returning, creating more supply. It would appear that the reinsurance industry is stabilizing overall, which is a trend that is expected throughout 2024, absent anything unexpected or significant impacting the industry. However, there is still a major focus on social inflation, economic inflation, litigation, finance, and the impact these concerns have on insurance company results.
This turbulent and changing market creates some risk areas from the regulatory perspective. Contract revisions or new terms could increase or create new exposures for the carriers to consider. Atypical contractual designs tend to surface during more turbulent reinsurance seasons, potentially challenging statutory risk-transfer requirements. Closer scrutiny of claim reserving patterns and results and enhanced due diligence of supporting reinsurance partner financial ratios become a consideration as carriers take on more risk.
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