The global reinsurance industry's biggest annual renewal looks likely to miss its Jan. 1 deadline as reinsurers, insurers and brokers grapple with big shifts in pricing and the terms for property-catastrophe cover.

The renewals are running one to two weeks behind the typical schedule, and the volume of quotes received from reinsurers is around one-third of what would usually be expected at this point in the process, according to David Priebe, chairman of Guy Carpenter & Co. LLC, a reinsurance broker owned by Marsh & McLennan Cos. Inc.

"A lot of reinsurers aren't really stepping up and providing pricing, coverage, capacity indications, so we're having to make decisions to go into the market with fewer data points, which makes it challenging," Priebe said.

A big reason for reinsurers' hesitance, according to Priebe, is a "significant reduction" in the available retrocession cover, which reinsurers buy to lay off some of their own risk, creating uncertainty about what cover they will be able to secure.

"It feels like a number of reinsurers are trying to understand what that looks like before they commit to both capacity commitments and terms and conditions on their front-end business," he said.

Hurricane Ian, which hit Florida at the end of September and which Swiss Re AG estimates will cost the global insurance industry $50 billion to $65 billion, has made retrocession even scarcer than it already was. Both traditional and alternative capacity have retreated because of heavy catastrophe losses in recent years.

Another reason for the lateness is that the price, terms and structure of the property-catastrophe market are going through "quite a fundamental rethink," according to Mike Van Slooten, head of business intelligence at Aon PLC's reinsurance solutions division.

"The reinsurers have absorbed a lot of losses over the last few years, and I think there's a view that there needs to be a rebalancing," he said in an interview. "When you've got a situation where price, retention, structure and coverage all need to be discussed and agreed, you can understand these are going to be protracted negotiations."

The renewal is the toughest since maybe the early 1990s, according to Tor Melbye, manager of group reinsurance and global accounts at Swedish insurance group Länsförsäkringar AB. The push for rate increases was "very consistent" across the market, Melbye said in an interview.

Double trouble

Percentage price increases for property-catastrophe businesses at Jan. 1, 2023, are widely expected to be well into the double digits. Prices increased 9% the previous year, according to a report from Howden Broking Group Ltd., which it said was the biggest annual increase since 2009. Mellbye said price increases could "very easily" be 25% or above this time. London-listed specialty insurer Beazley PLC predicted when announcing its recent £350 million capital raise that property reinsurance rates would increase 50% in 2023 overall.

Reinsurers are also pushing for more restrictive structures and terms in property-catastrophe contracts that would narrow cover and limit their exposure to loss. Changes being discussed include moving the trigger point for reinsurance payouts upward, which leaves the ceding company with more risk, and covering named perils only rather than all risks.

The changes are in part designed to factor in rising inflation, which is pushing up insured values, and also to limit exposure to so-called secondary perils, such as wildfires, floods and convective storms. While individually less costly than the peak tropical windstorm and earthquake risks, secondary perils are increasingly frequent and have played a big role in busting reinsurers' annual catastrophe loss budgets in recent years. They made up more than $50 billion of the $115 billion-insured catastrophe losses Swiss Re estimates the industry had incurred in 2022 as of Dec. 1.

The tighter terms and conditions are "maybe even as important, if not more important than what we're seeing on the rate side," Brian Schneider, senior director at Fitch Ratings, said in an interview.

Hurricane Ian boosted reinsurers' already-strong determination to push through big changes to prices and terms. Even before Ian, it was doubtful that the reinsurance industry would earn its cost of capital in 2022, largely because of a heavy year for natural catastrophe losses. Now, the industry is on track to deliver its sixth-consecutive set of sub-par annual results to investors, who were already doubting reinsurers' ability to price catastrophe risk.

"Since 2017, when we saw some significant catastrophe losses, the industry has really underperformed expectations and produced lower-than-expected capital returns," Laline Carvalho-Neff, senior analyst at Moody's, said in an interview.

Cautious capital, capacity cuts

In response to heavy losses, several reinsurers are cutting back property-catastrophe exposures. Some, such as Axis, have exited property reinsurance altogether, cutting supply of cover at a time when rising inflation is boosting demand. On top of that, the industry faces rising inflation, the prospect of recession in several countries, and continued uncertainty about the claims bill from the Russia-Ukraine war.

Reinsurers have also suffered from sharp drops in shareholders' equity as rising interest rates reduced the value of their bond-heavy investment portfolios. Global reinsurers' shareholder equity fell 34% in the first nine months of 2022, according to a report by reinsurance broker Gallagher Re. Those unrealized losses have not hit solvency and are expected to reverse over time as reinsurers reinvest in higher-yielding bonds. But the risk that the losses could be realized if reinsurers have to sell bonds suddenly to pay claims has added to reinsurers' caution about taking on catastrophe risk.

"That's just one more tailwind for higher property cat pricing," James Eck, senior credit officer at Moody's, said in an interview.

Reinsurance buyers should not expect much of a respite in the other business lines that renew at Jan. 1.

"All lines are hardening and firm [but] probably not to the degree that we're seeing in the property cat market," Priebe said.

In casualty, for example, Priebe said the renewals "are proceeding in an orderly fashion." However, reinsurers are having to consider whether social inflation, where high jury awards boost casualty claims costs, will return to pre-pandemic levels now that courts have reopened, and whether pricing adequately accounts for the potential for prior-year reserve strengthening, all of which is firming up casualty rates, Priebe said. He added that casualty-ceding commissions, which reinsurers pay on contracts where they pay a set percentage of all claims, known as proportional business, were "generally flat to down."

The large mismatch in supply and demand in the property-catastrophe market would typically trigger an influx of new money into the reinsurance industry, but the industry's recent performance is making investors wary. Some fresh capital has come in, such as Beazley's £350 million, although not all of this is for property reinsurance. Around $1 billion of equity has come into the traditional reinsurance space, according to Van Slooten.

"That's a drop in the bucket compared to what's gone out or what's being held back," Van Slooten said.