1/1 renewals: Risk challenges remain despite much smoother treaty negotiations

Despite a relatively smooth renewals process across Asia Pacific this year, brokers and reinsurers say that many of the underlying market conditions that led to such protracted negotiations at the start of 2023 remain.

Jeremy Waite, head of the APAC Catastrophe Advisory Group at Guy Carpenter, says that in 80% of the markets that the broker looks at, risk-adjusted rate increases were under 5%. Waite’s comments tally with what other brokers and reinsurers that Rein Asia spoke to have been seeing in the market.

While the 1/1 renewals at the start of 2023 where branded as the big correction, the renewals this year are being seen as a maturing view of some of the risk challenges that the market is facing, with reinsurers and cedents moving more in lockstep than they were previously.

Rate increases across APAC were held in check by a few things this year, including a lower-than-average loss environment, a reduced inflationary environment and the tendency for global reinsurers to use Asia for diversification purposes.

Most of the drivers of the rate increases and structural changes last year remain, and the nature of underlying risks continue to evolve.

Dan Bryan

Head of Reinsurance for Asia at AXA XL

However, few market participants see the softening of conditions as a reversal of the trend that started a year ago.

“We should be careful not to confuse a smoother renewal with a softer renewal in terms of rates and other terms and conditions,” says Dan Bryan, head of reinsurance for Asia for AXA XL. “Most of the drivers of the rate increases and structural changes last year remain, and the nature of underlying risks continue to evolve. As such, it is important that reinsurers continue to strive for rate adequacy while engaging clients to better understand the nature of their portfolio and risks.”

Competitive pressures

Reinsurers have spent the past 12 months clamouring for further rate increases and lamenting the fact that, for the past half-decade, they have struggled to earn their cost-of-capital.

We expected this renewal to be more orderly and predictable and that is exactly what we got.

Mark Morley

Head of Asia-Pacific at Gallagher Re

Much of this, however, may have simply been political positioning as they prepared for the expected flattening of rate rises.

“We expected this renewal to be more orderly and predictable and that is exactly what we got,” says Mark Morley, managing director and head of Asia-Pacific at Gallagher Re. “My sense is that, for most mature tier-one reinsurers, the outcome of these renewals was very much in line with their expectation.”

According to Waite, global reinsurers made an average “return on capital of between 15 and 20%” this year – which is far better than they have been making in previous years.

While last year reinsurers found it fairly easy to write their own terms and conditions, on both price and cover, this opportunity appears to have substantially subsided in the latest 1:1 renewals.

“We saw more consensus during the quoting process this year. This was not complete consensus, but certainly it was much more than we saw last year where the quotes were all over the place,” he says.  “As we went through the renewals process, it started to become more apparent that we had more capacity than we needed, which was completely different to the last renewals during which, by late December, it still wasn’t at all clear that we were going to get enough capacity.” 

As we went through the renewals process, it started to become more apparent that we had more capacity than we needed, which was completely different to the last renewals.

Jeremy Waite

Head of the APAC Catastrophe Advisory Group at Guy Carpenter

Regional differences

There are some regional nuances, however.

“Due to Covid losses, Taiwan market is generally harder than other territories,” says Cynthia Cui, Executive Director of Howden Specialty.

Whereas treaty renewal in Taiwan saw a minimum 50% rate rise last year, this year the rate rise was around 30%, she says.

“The other interesting observation we had was in some regions, such as Korea, the rate rises in treaty market are not reflected on the upfront,” says Cui.

This means that, when Korea insurers saw an 80% average increase in treaty renewals last year, insureds still expected rate reductions, especially for large programs.

The other interesting observation we had was in some regions, such as Korea, the rate rises in treaty market are not reflected on the upfront.

Cynthia Cui

Executive Director at Howden Specialty

China, also, experienced different pressures than many other markets in the region.

“Last year there was a narrative that China did not receive the same expected adjustments as the rest of the region and there is some truth in this,” says Morley. “I think it’s fair to say that with China we’re still seeing mostly single-digit growth, but perhaps more in the 5 to 10 range than 0 to 5.”

Market dynamics in China are complicated because there is significant domestic capacity available to Chinese entities. This continues to constrain rate increases in the country.

Chinese reinsurers typically source their capacity from the international retro markets. This led to higher rates globally could lead to a significant price transfer into China during the latest 1:1 renewals, but Morley says that this didn’t happen to the extent expected.

“The fact is that that most pro rata placements in China have maintained capacity support from the local and international market and there was more excess capacity out there than some had previously assumed,” says Morley.

Wei Wang, Chief Executive Officer of Rare Earth Partners, also thinks that China’s flagging economy may also have served as a dampener to rate increases.

“As you can imagine clients of direct insurers don’t have sufficient budgets to pay for premium rises,” says Wang.

Wang reports that he has even seen certain treaties discontinued this year, in cases where reinsurance support has become too expensive.

“It’s a very competitive market, which makes it very hard for the ceding company to agree to significant price increases,” he says.

It’s a very competitive market, which makes it very hard for the ceding company to agree to significant price increases.

Wei Wang

Chief Executive Officer of Rare Earth Partners

Two-way partnership

While last year’s renewals were characterised by bitter squabbling over where rates should end up, with reinsurers winning some fairly significant increases, discussions this year seemed to be imbued with a much more collaborative spirit.

“We’re starting to see more partnering between reinsurers and insurers. Reinsurers who are just picking and choosing some of the higher layers may not have been getting the signings that they were expecting,” says Waite. “Those companies that have got good data and can demonstrate they know what they’re doing in terms of pricing risk would generally be more favoured by reinsurer, so there’s a two-way partnership coming in.” 

This is certainly the approach that Axa XL has taken.

“In our discussions throughout 2023 we have engaged in many productive conversations with clients regarding the strategic decisions and deliberate underwriting actions they have taken to navigate the market,” says Bryan. “In the course of the 1 January renewals reinsurers will be positioned to give more credit to those companies that have not only carried out these actions but, importantly, are able to demonstrate the impact of these changes.”