News analysis: The 1/1 reinsurance renewals – What will 2023’s ‘challenging’ reinsurance market mean for UK brokers?

Reinsurance brokers have commented that the most recent 1 January renewal season was exceptionally rocky, and now – it seems – the UK’s regional sector is also caught up in the aftershock as premiums rise and capacity shrinks.

According to Aon, the latest renewals were “the most challenging in a generation, with property catastrophe risk seeing the largest rate increases and appetite changes”.

Gallagher Re said the season was “tense” and “late” and, while buyers could largely source capacity, this was typically “at higher cost and – in many cases – with adjustments to structures, through attachments and terms”.

Howden, meanwhile, spoke of a “convergence of geopolitical and macroeconomic shocks – war in Europe, fractured energy markets, 40-year-high inflation, interest rate hikes and depleted capital – as well as the second most expensive natural disaster ever in hurricane Ian”.

The interconnected nature of insurance and reinsurance is now being evidenced as brokers find that premiums are rocketing.

Massively challenging

Peter Blanc, group CEO of Aston Lark, said the season was “massively challenging because of the combination of a multitude of factors coming together at one time, and that hurricane Ian alone cost $115bn (£93.36bn), which is much higher than the $81bn 10-year average.”

Blanc added: “Higher reinsurance property and casualty rates increasing by some 45-100% will inevitably filter down to the primary market. Aviation and aerospace are rumoured to be seeing 100-200% price rises, which is really dramatic.

“This will manifest itself in a number of ways – the obvious reaction will be the primary carriers seeking to carry rate increases. But where carriers think the market won’t support the rate required, then they will simply withdraw either from specific classes, or – more likely – just change their appetite to withdraw from the areas of risk where they think profitability will now be impossible to achieve.”

Blanc noted that large property and casualty risks are set to be the hardest to place, but correspondingly “we may well see a greater appetite from insurers to grow in the SME arena because rates and terms are hardening significantly at the larger end”.

“Brokers will have their work cut out for them and this will be an ‘interesting year’ – amid inflation and energy challenges, and being asked to pay ever-increasing insurance premiums, is never a great combination,” he continued.

Further price rises

Martin Richards, a consultant at Tower Insurance Brokers, said the reinsurance sector is imposing limitations on the primary markets: “This will filter through to brokers who will see further price rises, particularly in the property damage and business interruption space.

Primary insurers are still pushing pricing on ‘vanilla’ risks in their continued efforts to roll back the damage that was done by the extended soft market.

Martin Richards

“This is exacerbated in the higher value, heritage/listed [buildings], and unknown construction sectors, to which must be added the impact of increasing values of 10% – 12% on general, and up to 30% for heritage/listed, as well as the general drive to eradicate under-insurance. Rate increases on higher sums insured is a toxic combination.”

But brokers stress that the heftiest rises are likely to occur later in the year, and some may not immediately be considering the impact of reinsurance.

Philip Williams​, chief operating officer for the Clear Group, commented: “I can understand why, for many brokers with clients to renew, this may not be at the top of their lists of things to consider, especially with the weight of change they are already facing, be it the Consumer Duty or the sector’s recruitment difficulties. But the effects of this important renewal season will be felt by UK broking.”

Williams agreed that most impact will initially be seen with more complex cases, “where high limits or certain coverage mean that insurers rely on facultative reinsurance. This will make for harder and longer placement processes for these risks, especially with small markets that may not have the balance sheet or appetite to insure these risks fully. 

“More generally, however, a poor 1/1 will lead to more risk selection from insurers and perhaps higher pricing, as insurers try to maintain their return on the capital employed.”

Higher capital costs

According to Williams, a key issue is “the UK supply chain for capital, ultimately supporting the insurance paper we all write on, as it is incredibly complex”. He explained: “We have insurers, managing general agents, alternative capital vehicles and the reinsurance market all acting on the supply side provision of insurance. 

“In a high-interest environment, we will see – and have seen – a reduction in alternative capital supporting insurance placement as capital is able to find higher returns in other places. This mean the pricing and appetite we see from insurers is already likely to be more sensitive to further reductions in the availability of capital.

“Insurers of all sizes will be placing reinsurance into the market, and while hurricanes and wars may seem distant from the UK, if domestic insurers have higher capital costs, they will inevitably try to pass these on to clients. 

Brokers in the UK regions are a resilient lot and, armed with context, they will be in the best place to navigate the challenges and motivations of underlying insurers and do the best job for their clients.

Philip Williams

“The 1/1 is the benchmark for reinsurance placement, and while not all insurers will be renewing their treaties in this period, it gives a clear indication of the direction of travel.”

Despite this, Williams added, “brokers in the UK regions are a resilient lot and, armed with context, they will be in the best place to navigate the challenges and motivations of underlying insurers and do the best job for their clients.”

Matthew Collins, managing director of Ascend Broking, noted that he is already seeing capacity shrinking for higher risk trades, “especially in property and business interruption areas such as waste or non-standard construction locations that could likely see higher insurance premiums”.

Collins added the UK motor sector is also seeing rate increases, linked to insurer losses predicted for 2022 and 2023, and the underlying inflation they are seeing on claims, parts, materials and labour from the benign market conditions in 2021.”

In November 2022, consultant EY, pointed out that while UK motor had achieved an underwriting profit in 2021, the sector is expected to return to the red. EY predicted that the net combined ratio for 2022 will be a loss-making 115% – the worst year since 2010, when it was 119% – and 114% in 2023. 

In addition to reinsurance costs, claims expenses continue to rise, because of high materials, labour and energy prices.

Fair pricing

Other factors include the Financial Conduct Authority’s fair pricing rules, meaning insurers can no longer offer cheaper quotes to new customers. EY said it believed motor premiums will rise by 15% in 2023; some £66 per policy. The spectre of increasing reinsurance costs may also be a factor in Direct Line’s woes, with the insurer recently issuing a profit warning. 

In fact investment banking analyst Jefferies suggested that the insurer may need to purchase additional reinsurance as a way of “bolstering its depleted capital”.

But is it all doom and gloom for brokers in 2023? Collins says he is encouraged by the fact that “the market is seeing new entrants in product segments such as directors’ and officers’ cover, professional indemnity and cyber that hold no legacy claims and are generating competition.”

The MGA sector, which is more nimble and typically has lower operating costs than composites, may also be well placed to capitalise on the current environment.

Gerry Sheehy, chief executive officer of The Fiducia MGA, said: “The impact of increasing reinsurance costs has not yet been fully felt in the primary market, but those insurers who are heavy purchasers of outward reinsurance will surely be looking to recoup those increased costs from their policyholders with the requirement for upward rate adjustments that will need to be passed on. Even so, the true fall out from this will probably take a little time to filter through into the market.”

Those insurers who are heavy purchasers of outward reinsurance will surely be looking to recoup those increased costs from their policyholders with the requirement for upward rate adjustments that will need to be passed on.

Gerry Sheehy

Sheehy continued: “Primary insurers will see increased retentions imposed on them by reinsurers that require higher reinsurance attaching points. We are already seeing that the risk appetite of a number of provincial insurers is changing, and we are seeing their participation on some of the larger limit business reducing to relatively modest lines well below £10m.

“At Fiducia, we have seen that the excess of loss insurance facility we have in place, that provides cover above a primary first-loss retention, becoming the subject of substantial rate rises in the fourth quarter of 2022 and January 2023.

“This facility provides protection from major incidents above a retention level for Fiducia-held or considered business, and also for brokers that are struggling to place business where insurers have reduced line size.”

A riskier place

Sheehy said his MGA works with around 500 provincial brokers, but in recent times it has also had a number of approaches from national brokers. He believes that this may be a reflection that these brokers are seeking a wider range of markets.

“National brokers will typically have market deals, with extremely wide wordings and higher commission rates compared to what is available elsewhere. We would not look to offer this, but we will talk to them and see if we can work together. There’s also a possibility that more brokers will place business with international insurers.”

The effects of the Covid-19 pandemic have collided with the fallout from Russia’s invasion of Ukraine to bring about a realignment, characterised by higher inflation, rising interest rates, increased recessionary risk, heightened security threats and accelerated deglobalisation.

Howden report on 1/1 reinsurance renewals

Howden’s report on the 1/1 reinsurance renewals concluded: “The world has become a riskier place. The effects of the Covid-19 pandemic – huge fiscal and monetary stimulus, supply constraints and high debt burdens – have collided with the devastating fallout from Russia’s invasion of Ukraine to bring about a great realignment, characterised by structurally higher inflation, rising interest rates, increased recessionary risk, heightened security threats and accelerated deglobalisation.”

The question will be whether inflation can be contained, and if insurers can ensure their pricing strategies prove effective, ensuring they continue to provide cover that is affordable, while still producing the results that entice capital back into the market.

Meanwhile, for brokers, the year ahead looks set to be punctuated by many difficult conversations with their clients on why premiums are rising when the main aim is to reduce the insurance spend.