Hope for buyers as reinsurance industry starts 2021 renewals: Willis Re

Reinsurers have largely halted the “persistent downward trends” in pricing that have been prevalent in recent years as the January 1, 2021 renewal season began, set against the ongoing global impact of COVID-19.

This is the finding of the 1st View renewals report from Willis Re, the reinsurance division of Willis Towers Watson, which said “reason and logic” were governing the firming reinsurance landscape.

Ahead of the renewal, reinsurers sensed opportunity in the market, indicated by the number of capital raises from existing and new reinsurers, while buyers approached the January 2021 renewal season with apprehension due to the COVID-19 impact on working conditions and exposures, according to Willis Re. But for buyers, renewed terms and conditions have been “less onerous” than they first feared.

A number of factors including poor underwriting results, falls in interest rates and emerging COVID-19 losses, all indicated that reinsurers were in a position to drive up prices and improved terms. But buyers highlighted that while some lines of business and territories have shown poor results, other areas have generated consistent profitable returns for reinsurers.

The report emphasised that the global reinsurance capital base had rapidly recovered during 2020, driven by a combination of improving investment markets, retained earnings and new capital, ending up 3 percent higher than year-end 2019. Willis Re said that this increase in supply of capital gave buyers “hope” that they would not be facing a truly hard market but more of a firming landscape.

However, buyers seeking reinsurance for short-tail portfolios with poor loss records found the renewal “demanding”, the report said. Reinsurers were reluctant to support aggregate and working layer covers, but appetite for higher, loss-free layers was greater.

Negotiations of pro-rata treaties were more “buyer friendly” in casualty lines as a result of underlying rates increasing “consistently and significantly”.

Willis Re found that in some cases buyers had balanced the demands for reductions in ceding commissions by opting to increase net retentions of risks that they now believe are adequately priced.

Incumbent reinsurers faced competition from carriers deploying fresh capital, but the worsening low-interest-rate environment and social inflation hit pricing on all excess of loss long-tail lines.

Capacity for property retrocession remained limited, but it was not as limited as some in the market expected. Willis Re said a number of factors contributed to this: ILS funds increased their assets under management; traditional reinsurers offered new or additional limit; and some buyers sought to acquire less cover. However, aggregate capacity was more constrained than occurrence, which led some buyers to respond with increased issuance of catastrophe bonds.

Willis Re’s report said that emerging COVID-19 losses, often confirmed late in the renewal process or yet to be confirmed at all, had triggered technical discussions of primary policy coverage and reinsurance treaty wordings. Such discussions are still in the “early stages”, so, most programmes renewed without considering any potential COVID-19 losses, Willis Re said. This has left time for more measured discussions and subsequent adjustments. In the interim, reinsurers have been unwilling, with few exceptions, to accept ongoing contagious disease exposures.

James Kent, global chief executive of Willis Re, said: “2020 brought vast economic and social disruption to many parts of society. It is important to recognise our good fortune as being part of an industry that continues to grow in relevance, and which has the potential to adapt to meet such challenges. This was reflected during the renewals process, as the resilience of the reinsurance sector shone through, not just to losses, but to working challenges. Once again, the dynamics of the sector have proved robust on all fronts.”