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ILS withdrawals from Australia contribute to tighter 1 July renewal

Brisbane City CBD, Queensland, Australia

ILS withdrawals from Australian reinsurance treaties are contributing to a tighter market at the 1 July renewals, as local cedants struggle to place underlying and aggregate covers in particular, sources told this publication.

Due to historic losses in Australia, combined with prior-year losses to aggregates, as much as 40% of prior ILS capacity has simply chosen to exit the local market, while others are at best recycling available capital without committing more, a source estimated.

Further afield, the pricing momentum in the US built up in earlier renewals this year has continued, with even loss-free contracts renewing with meaningful increases as traditional market capacity retractions and growing fears around inflation are also building up pressure more broadly.

While 1 July is difficult to quantify simply, given the broad geographical range of contracts renewing, there are signs that pricing in the international market, which has been notoriously difficult for reinsurers to move, is beginning to increase meaningfully.

In particular, even though Australian cedants have paid up in prior years following losses, this July marked a more challenging renewal that some compared to Florida market dislocation given the continent’s chequered loss history of recent years.

Key points TR Aus.png

Reduced reinsurer appetite 

One key factor in this round of renewals is a reduction in appetite for property cat business, continuing a trend seen at the January, April and June dates.

Sources described an overall lack of appetite for cat business, with many reinsurers looking to reduce their cat writings and others at most holding their cat volume at stable levels rather than growing.

Axis Re’s recently announced withdrawal from property reinsurance is “material”, sources said, particularly on a handful of Middle Eastern programmes where the carrier was leader, and on a number of international quota-share programmes where cedants are now struggling to replace the capacity.

They noted that Axis Re dropping of $700mn of property reinsurance business came after a reduction in cat capacity deployed by Everest Re, Axa XL Re, Fidelis, TransRe and others.

“We have seen a reduction in the appetite for cat in the peak zones [the US, Florida and Japan] and we are now seeing that rippling out to the international space,” a source said.

While some sources noted that the withdrawal of some players from the space has given Swiss Re and Munich Re the opportunity to scoop up more international cat business, there was a consensus that the world’s largest two reinsurers “have very clear market share targets” that they will soon reach.

This shortening of supply is proving difficult for international cedants, as reinsurers push for better pricing on what has historically been viewed as a less price-adequate class of business.

The underlying theme to reinsurance renewals in all geographies is inflation, and the difficulty of pricing accurately and adequately in an inflationary environment coming after two decades of low rates.

A number of sources spoke of the difficulty of pricing reinsurance contracts based on general pricing data that is already six months out of date, while trying to predict where inflation – and its impact on repair and supply chain costs – will land within the next year.

Some sources expect to see an uptick in top-up covers globally throughout the remainder of the year, as cedants look to protect their capital adequacy as inflation continues to rise.

Australian cedants feel the heat 

Last year Australian cedants renewed programmes with pricing up in the low to mid-single digits on clean business and low double-digit increases on loss-affected accounts.

This year, the negotiations look to be tougher for cedants, with reinsurers fighting for better increases than last year.

This spring’s flooding in South-East Queensland and coastal New South Wales – Australia’s costliest on record, bringing A$4.3bn in insured losses – is understood to be driving significant demands for price increases.

“For Australia, the terms are out and the pricing is up, but we don’t know yet where it’s going to land; the brokers are talking a really good game,” one source said.

Other reinsurance sources were more bullish on Australian property business, describing “huge rate increases everywhere” of above 20%, with more significant rate change on first layers.

“Australia is the new Florida,” a reinsurance underwriting source said, adding that some cedants are “really struggling” to secure coverage. Another participant described it as the tightest Australasian renewal since the 2011 Christchurch earthquake.

One source described the lower layers of Australian programmes as “the perils no-one wants”, with demands for rates on line (RoL) around 60% for the first layers of programmes. These covers were coming up short and late – only 20-30% placed at best, one week out from the final renewal date.

Suncorp last year renewed its A$6.5bn ($4.9bn) main cat programme without dramatic price increases, while it is understood the situation was similar for Insurance Australia Group’s (IAG) A$350mn excess A$400mn aggregate cover.

Cedants being forced to re-firm orders was another feature of this year’s Australian renewal.

There is also pressure from reinsurers for Australian cedants to increase their retention levels to insulate programmes from frequent flooding and hailstorm events, as well as to mitigate the impact of inflation on losses.

But the insurers are forced by regulatory requirements to buy up to certain coverage levels, including aggregate risks that have become increasingly tricky to place.

Even a bog-standard Northeast US property treaty is very hard to place

US momentum continues 

In the US, sources described a continuation of the trends seen at earlier American renewals this year, with one branding it a “complete change in underwriting mentality”.

Here, the lack of appetite for cat risk is also having an impact, even where loss activity has been low.

“Even a bog-standard Northeast US property treaty is very hard to place,” a reinsurance source said.

Another source described clean US business as renewing with increases in the double digits, with some cedants being forced to resubmit firm order terms.

UK renewals were said to be running late, while the more closely traded Latin American cat treaties are likely to be less volatile, as was the case for the 1 April Japan renewals where XoL rate increases were limited to low single digits.

But even if some international regions have a more normal renewal, the general tone is still one that supports the view that the cat market hardening is set to stick around for some time.

At 1 January, Guy Carpenter’s global property cat RoL index was up 10.8%, which would have cut across both loss-hit and loss-free business. In 1 July discussions, with double-digit increases being achieved on loss-free business in the rising-rate geographies, this provides an indication of the shift in gear as the year has gone on.

With inflationary expectations helping to set new minimum clearing prices for negotiations, underwriters are being “emboldened” by the increases they are securing, one said, setting in motion growing momentum for this shift of pace.

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