Tail wagging the insurance dog again
For the last few years of the longest hard market many can remember, it has been the insurance sector taking the lead.
Hard markets in the past have often been event-driven, with capital depletion and a reinsurance capacity crunch sending rates sharply up. Sometimes they have been isolated to specific lines of business, or sometimes broader if multiple classes were impacted.
Typically, they have been relatively short in duration, from one to three years.
But the sustained upward trajectory across the majority of insurance lines of business has been broadly in train since before the pandemic.
And the driver – as has been widely documented – was a market-wide change of underwriting behavior led by AIG and Lloyd’s, initially to shorten limits, tighten terms and push rate to offset underwriting results that had been poor for too long.
Throw in social inflation and other causes of elevated loss costs – and the pummeling that property underwriters have taken year after year – and it didn’t need reinsurance hardening to pull the primary market up.
The phenomenon spawned descriptions such as the U-shaped market, where it was the insurance and retro markets driving hard pricing conditions while the reinsurance sector lagged behind.
That has all changed though. A generational hard market in property cat that began after Hurricane Ian last year – with increased demand, retrenched supply and a step change in reinsurers’ view of risk – is not likely to see ground ceded back at 1.1.
It was the engine of a rehardening of the property insurance market this year, and a factor in the widespread retrenchment of admitted carriers from some of the more challenging cat-prone states – especially in personal lines.
Now, the talk in the lead-up to 1 January 2024 is all about casualty as the next shoe to drop.
Buyers and sellers of reinsurance are vocal (and largely in agreement) in their concerns about the trajectory of loss cost inflation and the potential for things to get much worse on reserves for old years, even given the significant progress that has been made towards disciplined underwriting more recently.
Reinsurers are pushing for at times meaningfully lower cedes on quota shares and higher rates on XoLs. For insurers this will squeeze the economics and should mean a greater emphasis on seeking further rate increases on the underlying business.
In other words, a broader re-hardening of the insurance markets looks increasingly likely, and this time it is the reinsurance tail wagging the insurance dog.