Navigating the 2024 Reinsurance Industry Outlook - Peak Re (2024)

Ongoing rising climatical, macroeconomic and geopolitical risks have led to significant price corrections and adjustments in global reinsurance terms and conditions in 2023, something that looks likely to continue into 2024, both in the reinsurance and retrocession markets.

This article was first published in the Asia Insurance Review in December 2023:

The rise of the US 10-year Treasury yield in October 2023 to its highest level since 2007 is indicative that elevated interest rates and tight liquidity are here to stay for an extended period. Indeed, earlier hopes that central banks would quickly turn dovish once inflation started to fall, were largely replaced with the realisation that sticky core inflation would force central banks to maintain monetary tightening.

At the same time, the global economic growth outlook remains clouded. While the latest US third-quarter GDP growth rate surprised on the upside, coming in at a strong 4.9%, growth narratives over the past year have instilled doubts as to the sustainability of this growth and the likelihood of a soft-landing, particularly given the high, long-term interest rates. Similarly, China reported a healthy third-quarter GDP growth rate of 4.9%, boosting hopes that full-year growth could reach the 5% target. However, the plights in China’s property sector have not eased, alongside increasing challenges to provincial government financing. Europe is also facing its toughest test since the outbreak of the pandemic, with the risk of recession remaining uncomfortably high.

Overall, sticky inflation and fragile global economic growth outlooks will continue to weigh on reinsurance by constricting the market’s capital availability and growth potential.

Disrupted reinsurance cycle

Another key consideration is the lack of fresh reinsurance capital inflows. Typically, large natural catastrophe losses trigger price hardening and an expectation of superior returns, inducing an influx of new reinsurance capital, as was observed, for instance, after the North Atlantic hurricanes of 2017. In contrast, in 2022 Hurricane Ian resulted in insured losses of around $60bn, but subsequent new capital inflows were minimal.

According to Gallagher Re, global reinsurance capital increased by an estimated 13% during the first six months of 2023, mainly reflecting retained earnings and unrealised investment appreciation. The amount of new capital raised has remained low. This anecdotal evidence points to a fundamental shift in investors’ perception of reinsurance as a means to generate attractive returns in the current environment.

Alignment of interest

Reinsurers correspondingly began 2023 with a long to-do list. Some have made good progress, for example with cedant discussions and the renegotiation of reinsurance terms and conditions centered on contract certainty and the implementation of exclusionary language to make coverage easier to understand.

At the same time, reinsurers have been busy conveying the message that they need to cover their cost of capital. The high losses sustained by the industry over past years were not sustainable, and a strong push-back was already being observed in the retrocession market. Cedants have largely concurred with this reasoning.

These adjustments to reprice and better define risks will increasingly filter into the direct market. For example, the fact that insurers’ retention levels have increased, driven by reinsurers’ growing concerns about natural catastrophes frequency risks, is likely to impact direct underwriting. Depending on local market conditions, some reinsurance rate increases will carry through to higher rates in the direct market, which will also help to signal the risk level of individual assets.

In addition, we have observed how these changes are already putting pressure on the placement of proportional reinsurance treaties and increasing cedant interest in gross excess of loss covers.

Importantly, compared to reinsurers, insurers have better access to data to capture risk differentiation. Collating more information and sharing it with reinsurers could help to further differentiate and refine pricing and enable the insurability of certain property risks.

2024 outlook

It’s almost tautological to say that the outlook is highly uncertain, but what has transpired in 2023 raises some fundamental questions about the future. In particular, the failure of the market to respond to high natural catastrophe losses and hardened rates with new capital influxes is a key concern. What pricing level will be needed to compensate for model uncertainties linked to extreme weather losses and climate change? Are these extreme events more correlated than previously expected, thus eroding the benefit of geographical diversification? Will the lacklustre investors’ sentiment prolong or fundamentally change how the reinsurance cycle works?

Model development is probably one of the factors that will help to improve the outlook. Another factor is the insurability of climate risks. For now, however, despite the adjustments through 2023, it’s clear that capital market uncertainty is lingering and therefore that new capital inflows are likely to remain limited. Investors appear to be waiting for material proof that the reinsurance industry can generate sufficient returns.

Turning to the Asia-Pacific region. While there are differences between Asia and the rest of the world, such as lower inflation and less steeply rising interest rates, the overall picture continues to support an extension of global reinsurance rate hardening to Asia. Emerging Asian markets are in any case more familiar with higher baseline levels of inflation, especially if accompanied by economic growth. Natural catastrophe losses are the decisive factor here.

In North Asia and parts of Southeast Asia, reinsurance rate increases at the upcoming renewals are likely to remain significant, alongside further adjustments in terms and conditions, primarily in response to the series of costly catastrophe activity in recent years including earthquakes, typhoons and floods. The September 2023 Hong Kong rainstorm and flood event, for example, is expected to be the costliest-ever event for the territory.

Similarly, in Australia and New Zealand, rate increases will continue to be driven by catastrophe losses, including significant losses from Australia’s South East Queensland flooding in 2022 and New Zealand’s 2023 Auckland floods and cyclone Gabrielle.

For Asia-Pacific markets, we expect capacity in 2024 to remain available at relatively stable levels, with allocation based on price sufficiency and clarity of terms and conditions. In other words, for sustainability and insurability, underwriting discipline is the focus. In particular, taking a general loading or experience approach to secondary perils is no longer appropriate. Such risks require more scrutiny and need to be priced explicitly.

Opportunity ahead

The region also still has significant and widening protection gaps, as well as multiple new risks, and therefore potential business opportunities, arising from developments including the drive towards energy transition, reshuffling of the global supply chain and increasing regional integration.

Mr Clarence Wong is Peak Re’s chief economist and Mr Henry Phillips is Peak Re’s senior vice president, underwriting.