The complexities facing the reinsurance market in 2024

In the ever-shifting landscape of insurance and reinsurance, understanding the dynamics of the market is essential for both industry players and consumers alike.

Amidst challenging times, Jane March, the CEO of Guy Carpenter South Africa, offers her expertise and insights into the factors driving the current hard market and the evolving role of reinsurance in mitigating catastrophic losses.

Key factors contributing to the hard market

Recent market conditions, according to March, have been shaped by a confluence of global and local factors.

“Increased global catastrophe loss activity, coupled with macro headwinds such as rising interest rates and geopolitical tensions like the conflict in Ukraine, have created significant challenges,” she said.

“These factors, alongside climate change concerns and constrained retro capacity in 2023, have reverberated through the South African market, exacerbating conditions,” she added.

Mitigating catastrophic losses

In the face of escalating climate change events, the role of reinsurance becomes increasingly pivotal.

March emphasised that reinsurance provides essential financial relief following major event losses, facilitating quicker recovery for businesses and supporting overall economic resilience. However, with the recent surge in both the frequency and severity of natural catastrophes, questions arise about the sustainability of current pricing models.

“The imperative for adaptation and innovation is underscored by the sobering reality that 2023 was recorded as the hottest year on record, amplifying the urgency of addressing climate-related risks,” she said.

“While current catastrophe models are based on historical data, it is key to consider how the potential impacts of climate change can be overlaid on these models to enable more accurate forward-looking predictions,” she continued.

March said strict underwriting criteria needs to remain in force, and most players are focussing on aggregation of risk in areas that appear more exposed to catastrophe losses for example, flooding. “This could lead to a shortage of capacity for direct clients in certain areas, with the potential for some being unable to obtain adequate insurance.”

Evolving role of reinsurers

Reflecting on the evolution of reinsurers' role, March noted a shifting landscape.

“In more favourable market conditions, reinsurance capacity is abundant, and pricing tends to be competitive. However, recent loss activity and deteriorating financial results have led reinsurers to be more selective in providing capacity,” she said.

This shift, according to March, has prompted direct insurers to retain more risk, particularly for catastrophe cover, in response to the escalating frequency and severity of catastrophe events. “Despite some upward pricing pressure, these interventions have contributed to improved reinsurer results for 2023, fostering a more stable renewal season in 2024.”

“While reinsurers are showing improved returns following the interventions over the last renewal season, especially the increased retentions, more of the catastrophe loss costs are now being retained on the primary insurers’ balance sheet. This affects capital requirements and consequently the pricing of insurance,” she added.

Outlook for 2024 and beyond

Looking ahead, March acknowledged the challenges, particularly in the property and casualty sectors. “Reinsurance renewals are expected to remain tough, with capacity and appetite hardening, especially in areas such as physical damage, business interruption, third-party liability, and crime.”

Despite these challenges, March's insights suggest that strategic risk management and collaboration will be key in navigating the complexities of the market landscape.

So, how should insurers and reinsurers strike a balance between managing risk exposure and maintaining competitiveness in the market? “The two main factors at play are reducing claims costs or increasing pricing. Factors could be to increase retentions or limit coverage on direct policies, and/or increase premiums, implementing risk mitigation strategies aimed at reducing loss, such as land use management, will play an important role moving forward” she said.

She concluded that “with improved results for most reinsurers for 2023, reinsurance capacity is adequate, but underwriting discipline remains. Catastrophe losses do not appear to be lessening, and it appears the price and coverage reviews will continue.”

Writer’s Thoughts

In a landscape marked by uncertainty and evolving challenges, these insights shed light on the complexities facing the reinsurance market in 2024. As we navigate through tough renewals and heightened risk exposure, March’s expertise underscores the importance of strategic risk management and collaboration. The imperative for adaptation and innovation in pricing models, coupled with rigorous underwriting criteria, remains paramount. Do you agree? Please comment below, interact with us on Twitter at @fanews_online or email me - myra@fanews.co.za