Strong first-half results may prove to be a false dawn for reinsurers

Expectations were high for the reinsurance renewal periods in 2021 and while the best of those expectations has not been met, the story has generally been positive. But risks remain from the global pandemic and from natural catastrophe events.

Reinsurance renewals at 1 January 2021 saw prices increases in many lines. Though not quite as strong as some had hoped for, the rises were welcomed as a positive sign for the year ahead. But a question lingered – would the gains continue? 

Mike Van Slooten, head of business intelligence at Aon’s Reinsurance Solutions, says uncertainty is still the order of the day. 

“If anything, some of the heat has come out of the pricing as the year has progressed,” he says. “That is partly because of the capital that has come in and partly because the mood around Covid has improved. The capital markets in the developed world have started to look through Covid towards economic recovery and growth.” 

The usage of exclusionary language has protected reinsurers from incurring material additional non-life claims from the pandemic in 2021, but significant losses have still emerged from life and health reinsurance portfolios, mainly relating to excess mortality in the United States. 

The reality is that, in many parts of the world, the battle to contain the spread of the Delta variant is continuing, often hindered by relatively low vaccination rates. But it is unlikely that global reinsurers will feel much of the impact, given the lower insurance penetration rates in less developed markets. 

“Having paid and reserved for losses of many billions of dollars, the impact of Covid on the reinsurance market is now diminishing,” according to Van Slooten. 

On the non-life side and in developed markets, the continuing uncertainty around business interruption losses incurred in 2020 remains the main issue ahead of the renewals. 

“It is only recently that affected insurers have begun approaching their reinsurers for recoveries,” says Van Slooten. “The contract language will govern where we end up – the devil is in the detail and in some cases the relationships between cedants and their reinsurers will be tested. But from a broader perspective, there is more than enough capital in the system to handle these losses.” 

Turning to the impact of natural catastrophes, global insured losses were above average in the first half of 2021 and yet Aon estimates that the reinsurance sector was still able to operate at a combined ratio of around 94 percent, with the impact of past rate increases now visibly earning through. 

The main issue now is that the second half of the year has also begun poorly, with multiple high-profile flooding and wildfire events and early signs that the Atlantic hurricane season will be as active as predicted. Insured losses from widespread European flooding in mid-July and Hurricane Ida at the end of August will be substantial, taking us close to the 10-year annual average with four months still to run.

“Peak perils are well understood, but the frequency and intensity of losses coming from so-called secondary perils is a major concern and will be a factor in maintaining underwriting discipline going forward, irrespective of what happens in the remainder of 2021,” says Van Slooten. 

Amid all the uncertainties, Van Slooten believes there has been positive underlying change, notably in the Lloyd’s market. 

The Decile 10 initiative launched by Lloyd’s in 2018 to address underperforming business has, Van Slooten argues, been a success and one that would be more visible had it not been for Covid-19. 

“Reviewing the worst 10 percent of your business is simply good house-keeping, but a lot of the benefit was masked by Covid-related losses in 2020. This year, the impact of compounding rate increases is clear and we think the cost of capital will have been comfortably covered in the first half.” 

Looking to the full year, Van Slooten strikes a note of caution. 

“Reinsurers can still make reasonable returns in 2021, but only if natural catastrophe activity is very benign in the remainder of the year,” he says. “31 December is still a long way away and January renewal outcomes will be sensitive to what happens between now and then.”