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Promising signs of softer insurance | reinsurance markets

05 February 2024 Gareth Stokes

The hard market conditions that have dominated insurance and reinsurance premium negotiations over the past three- to five-years is showing signs of easing as we enter 2024, suggesting better times for local insurance brokers and risk managers as they seek to transfer risk.

Ample capacity offset by underwriting rigor

In a recent media release, Guy Carpenter, a leading global risk and reinsurance specialist and a business of US-listed Marsh McLennan observed that the January 1 renewal showed signs of a responsive reinsurance market, reflecting ample capacity and a commercial approach to trading partnerships, albeit with continued underwriting rigor. Overall, Guy Carpenter expected rebounding capital and healthy reinsurer returns to underpin the global reinsurance sector into the New Year. 

The firm, in partnership with AM Best, estimated that total dedicated reinsurance capital had increased by 10% compared with year-end 2022. “The January 1 market reflected more balanced trading conditions providing cedents improved opportunities to achieve their objectives while maintaining key reinsurer relationships,” said Dean Klisura, President & CEO at the firm, adding that technical discussions remained essential to reinsurers’ increasing appetite and capacity allocations. 

This is good news for South African insurance professionals, who have battled to place risks through a multi-year hard insurance market. In a thought leadership piece published late last year, Cedric Masondo, CEO at PSG Insure, offered insights into the five-year-long hard market that domestic insurance and reinsurance firms had contended with. “COVID-19 was the first in a series of unexpected disasters, volatile market forces and social instabilities that contributed to the development of a hard market,” he wrote. “At the beginning of 2023, conditions in the local insurance markets tightened further, resulting in arguably the most persistent hard market in recent history”. 

Defining the hard market phenomena

Everything you need to know about non-life insurance in South Africa’, a comprehensive publication on the country’s non-life insurance sector, defines a hard market as one “characterised by rising insurance premiums, stringent underwriting criteria, reduced insurance capacity and tough restrictions to cover, among other factors”. Somewhat counterintuitively, this is “a period during which underwriting profits improve significantly leading to an industry-wide boom”. To support the definition, Guy Carpenter opined that global reinsurers would lock in around 20% in return improvements for 2024. 

Commenting on the insurance industry’s post-pandemic loss experiences, Masondo reminded readers of the spate of riots that afflicted South Africa in 2021, followed by torrential flooding in KwaZulu-Natal (KZN) in April 2022. Masondo was at the helm of state-owned special risks insurer Sasria SOC Limited when the aforementioned riot events caused billions in economic and insured losses in parts of Gauteng and KZN. “For South Africans, these untimely events played out within the broader context of the ongoing and then-deteriorating energy crisis, which caused large-scale damage due to power surges, equipment failure and inventory losses,” he wrote. Loadshedding was singled out for changing the local risk landscape, with many insurers removing certain kinds of cover; imposing restrictive clauses; and increasing exclusions. 

“For reinsurers, it has been time to batten down the hatches, to increase rates and tighten terms,” Masondo wrote. “In an attempt to consolidate and brace for the impact of the hard market, underwriters deemed certain disruptions such as grid failure to be uninsurable [and] these changes soon trickled down to insurers, and ultimately, clients, who have contended with getting less comprehensive cover for the same or a higher premium”. Tough actions taken by insurers and reinsurers to limit exposures placed a greater level of responsibility on insured parties to implement tighter risk management strategies. 

Enduring natural catastrophe and war

Globally, Europe saw an increase in natural disasters while the Russia-Ukraine conflict put further pressure on supply chains. “These events triggered an upsurge in claims, many of which were related to business interruption (BI) and property damage [and] as a result, countless insurers and reinsurers realised that some exposures had not been adequately priced in,” Masondo said. 

He pointed out that the long-term effects of hard market pricing and the general tightening of policy had reflected positively on the balance sheets of insurers and reinsurers. “In fact, many insurers have reported that they have maintained optimal levels of profitability and are now better equipped and prepared to tackle emerging risks with a greater level of foresight and experience,” he wrote. However, although there are promising signs of stabilisation in the insurance and reinsurance sectors, it may be too early to call an end to hard markets domestically. 

“Investor appetite, client expectations and the repricing strategies implemented by insurers to manage the impending risks, have reached a plateau,” explained Masondo. “This does not mean that the hard market is a thing of the past; to the contrary, the hard market is likely to persist well into the new year, especially in light of the country’s uncertain political outlook”. In this context, insurers will be keeping an eye on key financial metrics and be prepared to walk away from bad risks to achieve long-term financial sustainability. 

“This bodes well for an industry that has reached a state of relative stability after several peaks and troughs,” Masondo wrote. He added that “the hard market does not [necessarily] mean higher premiums and more stringent underwriting conditions” because better-capitalised insurers “are eager for good business and are poised to meet the needs and demands of the existing customer base”. In his view, insureds will be able to negotiate competitive premiums and get real value for money in the New Year

Getting to grips with client-level risks

Globally, Guy Carpenter noted that although the year-end-2023 January 1 renewal period was smoother than the prior year, “there were still geographies and client segments that faced challenges reaching market-clearing pricing and structure; outcomes were dependent on loss experience and technical, data-driven insights, reflective of reinsurers’ focus on a more in-depth understanding of portfolio dynamics”. And in a development that will likely impact South African insureds, the global risk specialist confirmed a shift in focus from property to casualty renewals. 

Glossing over most of the technical commentary, global property catastrophe reinsurance saw near-flat to single-digit rate changes for non-loss impacted programmes, and 10-30% for loss-impacted programmes. “Casualty saw pressure on pro rata ceding commissions as well as excess of loss pricing.; while negotiations were nuanced and bespoke, capacity was ample once market clearing terms were met,” Guy Carpenter wrote. This after a year in which total insured industry ‘large losses’ stood at around USD94 billion. 

Guy Carpenter reminded readers of the value in reinsurance. “A healthy, functioning reinsurance market is critical to the global economy; the sector’s value to the world financial structure is in its ability to create equilibrium and opportunity,” said Laurent Rousseau, CEO, EMEA and Global Capital Solutions. 

PSG Insure, meanwhile, focused on the important role that insurance and reinsurance brokers play in structuring insurance programmes. “These shifts have brought the critical nature of insurer-adviser and adviser-client relationships to the fore,” Masondo said. “Clients can expect to lean on the industry experience and specialist knowledge of their advisers”. 

Combatting new and emerging risks

“The local insurance landscape is up against a barrage of new and emerging risks such as weather pattern disruptions caused by climate change; the dramatic uptick in cybercrime; a sluggish economy; and the deterioration of state infrastructure,” Masondo concluded. This environment demands proactive, sound insurance solutions from insurers and reinsurers operating in a more stable global marketplace. 

Writer’s thoughts:
It can be difficult to ‘call’ the inflection point between hard and soft insurance and reinsurance markets. Does your January 2024 renewal experience point to a softening, stable insurance market or are local insureds in for a tough year? Please comment below, interact with us on Twitter at @fanews_online or email us your thoughts editor@fanews.co.za.

 

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