Howden: convergence of shocks fuelling market volatility

International re/insurance broker Howden has released its annual market report in what it described as a time of acute, evolving sector dynamics.

According to Howden the convergence of geopolitical and macroeconomic shocks – war in Europe, fractured energy markets, 40-year high inflation, interest rate hikes, depleted capital – as well as the second most expensive natural disaster ever (Hurricane Ian), has introduced significant volatility into the market.

“Divergent rate momentum by class of business had been the recent norm as individual mini-cycles responded with varying levels of sensitivity to losses and broader macroeconomic factors,” said Howden. According to the broker pricing cycles in the commercial insurance and reinsurance sectors are now converging, marked by price increase moderation overall for the former, albeit with strengthening in challenged areas, and rapid acceleration (dislocation even) for the latter.

Mounting pressures in the reinsurance market, already evident during last year’s mid-year renewal cycle were exacerbated significantly by Hurricane Ian after it made landfall in Florida as a category 4 storm, reinforcing one of the hardest reinsurance markets in living memory. Demand-side pressures coincided with a severe capacity crunch, as capital providers pulled back whilst others were only willing to maintain allocations.

This was, in turn, driven by a significant impairment of dedicated reinsurance capital, which fell sharply as investment grade securities experienced their worst performance in over 40 years. Historically, the sector’s gearing to high grade, short-to-medium duration securities has bolstered its capital position in an era of ultra-loose monetary policy. Reinsurers must now navigate an environment of rising inflation expectations and higher interest rates, which has driven assets lower on a mark-to-market basis.

Howden highlighted capital erosion of 15.7% to $355 billion at YE22, the first full-year decline since 2008, together with significantly higher premiums, sent the sector’s solvency margin ratio (capital divided by premiums) to below 100, a level last recorded during the global financial crisis. It also left certain reinsurers more exposed to liquidity and credit risks at a time of heightened claims uncertainty.

“The reinsurance sector has reached concurrent secular and cyclical tipping points,” said David Flandro, head of analytics, Howden. “It is experiencing sustained, heightened loss activity and war risk just as the global economy exits the ‘great moderation’ of interest rates and asset price volatility. Pursuant increases in carrier costs of capital are underpinning higher rates-on-line, lower capacity levels, and straitened terms and conditions.

“The last time we saw this level of capital dislocation was during the 2008-2009 global financial crisis. At the same time, the sector is experiencing its most acute, cyclical price increases since the 2001-2006 period if not before.”

All of this has converged to create highly challenged and complex reinsurance renewals at 1 January 2023. Structures and coverage terms were at the forefront of property-catastrophe negotiations this year, amidst recognition from all parties that prices would rise significantly. Reissued firm order terms, non-concurrent terms and diversification plays leveraging demand for catastrophe capacity as a way to improve access and margins for non-property business reflected shifting market conditions.

José Manuel González, chief executive, Howden Broking added: “Unlocking capacity in order to find solutions for rapidly changing risks that may soon outgrow the sector’s capital base will be crucial to maintaining relevance and offering clients coverage that meets their needs. This is especially true for 2023, given the considerable macroeconomic and sector uncertainty, as well as the challenging start to the year for the reinsurance sector.”

“Capital will therefore be a key differentiator for insurers, reinsurers, MGAs and ILS funds, which plays to the strategic investments Howden has made in this area in order to facilitate inflows, create capacity and find solutions for clients across the insurance value chain. Current market conditions demand a new approach to broking that is cycle-savvy, innovative, aggressively entrepreneurial and home to the sector’s strongest talent.”