Wide range of 1/1 premium rate and volume outcomes suggests very different sentiment among the ‘Big Four’
Reported results highlight fundamental differences in risk appetite and actions to optimise current market conditions, which may reflect divergent levels of comfort with the renewing book
Litmus Analysis’ Reinsurance Renewal Roundup – January 2023
An examination of the P&C treaty renewals of the big four European reinsurance groups
Lewis Phillips Consultant Analyst
Lucy Stupples Consultant Analyst
Introduction and Executive Summary
Market bellwether
According to data from A.M. Best, the big four European reinsurance groups (Hannover Re, Munich Re, SCOR and Swiss Re) account for some 40% of global P&C reinsurance premiums and are a bellwether for the market as a whole. Their January renewals encompass close to half of their traditional treaty reinsurance premiums.
These four groups provide greater detail than their Bermudian and international peers, their experience acting as a useful indicator for the market as a whole. In addition to commenting on their individual experience, Litmus uses their disclosures to present a composite picture.
Figure 1 Rate and premium development at 1 January 2023 renewals
Source: company disclosures, Litmus Analysis
Key theme
- Swiss Re took advantage of favourable market conditions to grow its book and reported a strong overall price increase at this renewal, while SCOR’s reduced risk appetite resulted in a contraction in premium volume. Munich Re and Hannover Re took a more nuanced approach to renewals
Underlying trends
- While SCOR reported a substantial reduction in its Nat Cat probable maximum loss, the three other companies showed a stable or increased appetite for this class
- There was a further marked shift away from proportional business which was seen to be susceptible to underlying economic and social inflation
- With portfolios restructured, aggregate growth was constrained at 2%, compared with 10% achieved in January 2022
- Risk-adjusted pricing firmed overall, as price increases were achieved on almost all lines and territories in excess of underlying loss trends and inflation
- Casualty rate increases lagged behind those for Property
- Rising interest rates were said to have provided a further boost to the expected profitability of new business
- Each of the companies expects these favourable trends to continue through subsequent renewals through 2023
(Risk-adjusted price changes are as reported by the four companies. As such, the figures stated reflect each company’s assessment of the underlying risk, including trends in inflation and losses. It is important to note that each company has its own method to calculate rate changes, which may not be fully comparable, and the overall results will also be a function of differing business mixes.
Litmus Analysis has calculated the aggregate price change as the premium weighted average for the changes reported by each company.)
The four largest European reinsurance groups achieved an overall risk-adjusted price increase across their books at the recent 1 January 2023 treaty renewals, but differing attitudes and risk appetites were evident in the divergence in renewed premium volumes. In aggregate, the combined book grew by 2% (1.1.2022: 10%), ranging from a 12% contraction for SCOR to growth of 13% for Swiss Re.
1 January is an important date in the reinsurance industry’s calendar, as the renewal date for the bulk of European P&C treaties and much other business around the world. All the major reinsurers provide some commentary on their January renewals, but the big four European reinsurers (Hannover Re, Munich Re, SCOR and Swiss Re, who together represent around 40% of global P&C reinsurance premiums) provide more detail than their Bermudian and international peers. In this brief report, we examine the public disclosures from these companies, and have aggregated the four to present a composite picture.
Europe and Americas dominate
Around two thirds of European treaties renew at 1 January, with important contributions from the Americas and Asia Pacific. Together, these regions represent somewhat over half of the aggregate premiums up for renewal.
1 January 2023
For this group, around half of traditional treaty reinsurance premiums were up for renewal at 1 January 2023. Other important dates are 1 April (when the focus is on Japanese and other Asian business), 1 June (Florida cat) and 1 July (some US, Australasia, and other global programmes). Facultative and Specialty have no common renewal dates and are spread throughout the year.
We have combined the reported renewal experience of the four groups, and the overall picture is shown in Figures 2 and 3.
Swiss Re reports in US dollars; for the purpose of this aggregation, its figures have been converted into euros using the 1 January 2023 exchange rate of USD 1 = EUR 0.934
Figure 1 shows the overall rate and premium development at renewal reported by the four companies. Swiss Re reported the biggest increase in renewed premium volume, up 13%, despite a cautious approach to proportional Property and some Casualty classes. In contrast, SCOR’s renewed book contracted by 12%, as it focused on portfolio optimisation, particularly through a substantial reduction in its exposure to natural catastrophe business and also in inflation-sensitive lines such as Casualty and Motor.
Each of the companies in our study reported an overall increase in risk-adjusted pricing, ranging from 2.3% for SCOR to 18.0% for Swiss Re (1.1.2022 range: 0.7% for Munich Re to 4.9% for SCOR), with price increases across almost all lines and territories, especially on loss-affected business, reflecting underlying loss trends and inflation – both economic and social. Terms and conditions were said to have tightened, with higher attachment points and exclusions being noted.
The development of the renewal for the group is shown in Figure 2 above. EUR 37.5bn of treaty reinsurance premiums were up for renewal. Of this 12% was cancelled or replaced (which includes reductions in shares on renewing treaties as well as business declined and not renewed), giving a total of EUR 33.1bn which was renewed. The 7% increase at renewal represents both the effect of price changes and increases in shares on treaties. New business contributed an additional 7%, benefiting from growth across most core business lines. The combined portfolios grew 2% to EUR 38.3bn, compared with 10% growth reported at 1 January 2022. In aggregate, the weighted average price increase was 8.3% (1.1.2022: 2.7%).
Hannover Re’s premium volume dropped 1% as it took “conscious decisions on portfolio steering” with a further shift from proportional to non-proportional and business and contractions in APAC and some Specialty Lines. Munich Re’s renewed book grew 1% as increases in non-proportional and Specialty lines more than offset volume reductions in proportional treaties.
Once again, each of the companies in our study commented that the favourable trends experienced at the January renewals were expected to continue through the later renewals during the year. Rising interest rates were noted as a contributor to increased economic profitability of new business.
Time series
Figure 4 shows the reported growth in renewed premiums of the group over the last four January renewals. The aggregate showed growth in each year, but the rate of growth slowed in 2023. The picture for the individual constituents was more mixed, with at least one company reporting a reduction in renewed premiums in each year.
Figure 5 shows the development of the overall premium rate change over the period. Each company has reported positive rating development at each renewal, but that disclosed by Munich Re has been consistently lower than those of its peers. This may reflect differences in methodology and business mix.
Hannover Re
Hannover Re had EUR 9.9bn of traditional treaty reinsurance premiums up for renewal at 1 January 2023, representing 63% of its total book (excluding structured reinsurance, ILS and facultative business). A further EUR 5.7bn of traditional treaty business is due to renew later in the year. 42% of renewing business came from Europe, Middle East and Africa (EMEA), 25% from the Americas, and 15% from the Asia Pacific region, with the remainder comprising global specialty business. The company pointed to a sixth consecutive year of improving conditions in the reinsurance markets with substantially improved market conditions in P&C reinsurance due to tighter capacities and continued heavy loss experience in 2022.
Hannover Re noted strong positive pricing momentum, driven by strong demand and elevated natural catastrophe exposures. These trends were reinforced by a decline in available capacity as less capital was allocated to property reinsurance (in part due to rising interest rates which have depressed available capital), inflation and limited inflows of capital into the ILS markets.
Despite rising premium rates, Hannover Re’s renewed treaty premium income declined by 1%, adjusted for exchange rate movements, compared with growth of 8% at the 1 January 2022 renewal. Premium volume declined as business was restructured, with a further shift from proportional to non-proportional covers, including higher attachment points and cancellation of business not meeting return targets. The volume reduction was not fully offset by price rises, volume changes and new business. Non-proportional premium volume rose by 21%, but this did not fully compensate for a 9% reduction in renewed proportional business.
Terms and conditions were said to have firmed significantly with higher retentions on non-proportional treaties, more risk mitigating features, less supply of aggregate protections, and more exclusions and restrictions on the underlying insurance covers.
Hannover Re reported price rises across all major markets/business lines, but the picture for premium volume was mixed as growth in EMEA and the Americas was more than offset by reductions in APAC and specialty lines.
The strongest growth was achieved in the Americas, where premiums grew 7% (although large parts of this book renew later in the year). Principal drivers were the loss experience through 2022, including Hurricanes Ian and Fiona and other adverse weather-related events, which provided impetus for price rises, which averaged 12.9%.
After growing 8% at the January 2022 renewal, APAC business volume decreased by 22% in January 2023 following heavy losses across the region, as Hannover Re chose to reduce its exposure through cancellations on business not meeting acceptable price and conditions and reduced participation on some proportional treaties.
Substantially improved pricing and conditions were obtained on Global Markets business, in response to large losses and the war in Ukraine. Hannover Re said it was taking a cautious approach to Credit, Surety and Political risks, where losses are expected to rise from current low levels in response to the global economic situation. Aviation and Marine premiums contracted by 2%, despite sharply higher prices, as the book was re-underwritten and certain business discontinued. Agriculture premium volume similarly contracted 2% in response to market conditions, with drought losses in Brazil causing losses during the past year.
On its total renewed book, Hannover Re achieved an average price increase of 8.0%, compared with 4.1% at 1 January 2022. The highest rate increases were achieved in Nat Cat exposed business, while more modest rises were seen in Casualty lines.
Average risk-adjusted pricing on proportional business (68% of renewed premiums) was up 3.4%, while non-proportional pricing rose by 20.7%. The main drivers of price increases were said to be the interest rate environment, loss experience, and inflation.
The treaty renewals exclude EUR 1.1bn of facultative reinsurance premiums and EUR6.6bn of structured reinsurance and ILS transactions, all of which renew throughout the year.
Commenting on structured reinsurance, Hannover Re again pointed to continuing high demand for tailor-made reinsurance solutions and noted appreciable market hardening in the face of a shortage of market capacity. Demand for facultative covers was said to be strong, with growth of more than 10% anticipated on an underwriting year basis and average rate increases expected in the high single digits.
In response to heavy catastrophe loss activity during the preceding year there was strong demand for both treaty and facultative covers, with booked premium volume up some 30% at 1 January and risk-adjusted prices up 30%.
Munich Re
With a focus on Europe and North America (mainly excluding hurricane cover which renews later in the year), 44% of Munich Re’s total P&C reinsurance book was up for renewal at 1 January 2023. North America comprised 33% of the renewing book, Europe 27%, Asia, Pacific and Africa 12%, Latin America 2% and worldwide business 12%. Natural Catastrophe business comprised 11% of the renewing book.
EUR 15.1bn of premium was up for renewal, and the renewed book grew by 1%, compared with an increase of 14% at the 1 January 2022 renewal, resulting in EUR 15.3bn of premiums. The emphasis of this renewal was on selective growth and portfolio optimisation as Munich Re reduced the share of proportional business, but the volume lost here was offset by growth in more attractive, higher rated, non-proportional lines, particularly natural catastrophe covers.
In a conference call with analysts, Munich Re said the growth was negatively impacted by the non-renewal of one large whole account treaty. Excluding this, rise in renewed premiums would have been closer to 10%. Munich Re commented that it continued to position itself as a reliable long term partner for its clients, seeking growth opportunities from the development of business across most regions. The change in volume by major class ranged from a decrease of 5% in proportional Casualty (50% of the renewing book) to growth of 35% in non-proportional Property, where natural catastrophe was a feature. The principal growth driver was additional shares on existing business and new business from selected clients, particularly in Europe, Asia and Australia.
Across the book, an average risk-adjusted price increase of 1.3% was achieved at this renewal (1.1.2022: 0.7%), with further improvements in terms and conditions. Price increases were achieved through all major regions and were said to more than compensate for significantly higher loss estimates in some classes, which reflected both underlying loss trends and higher inflation. Munich Re also pointed to some tightening of capacity in certain markets from both traditional reinsurers and from capital market participants.
Munich Re said margins on natural catastrophe were “highly attractive” and that it has capacity within its risk appetite for this business in the current pricing environment. Despite the strong price rises achieved in this class, its small share in the current renewal contributed to the relatively muted overall price increase reported.
Proportional Casualty business was pruned, mainly in the USA, where the focus was on better-rated non-proportional covers.
Munich Re pointed to material improvements in terms and conditions, including hours clauses, exclusions and clearer coverage definitions, as well as higher attachment points and distinct pricing of covered perils. Munich Re expects the market environment to remain positive and to present attractive growth opportunities in the upcoming April (Japan focus) and July renewal rounds (USA, Latin America and Australia) where claims experience in individual market segments would be an important influence on renewal negotiations.
SCOR
Once again, SCOR’s emphasis at the January 2023 renewal was further portfolio management, as it sought to improve the expected technical profitability and the risk-return profile of its P&C portfolio. Optimization of capital allocation, by line and client, was a key focus. The company took advantage of favourable market conditions to continue to grow its Global Lines book, while further trimming its catastrophe book and reducing exposure to lines most sensitive to economic and social inflation.
Overall, 67% of SCOR’s treaty reinsurance book was up for renewal, with 89% of the European portfolio renewing, 48% of the US book, 34% of Mature Asia-Pacific and 53% of Middle East & Africa, Latin America and Caribbean markets. A total of EUR 2.7bn of P&C Lines premiums and EUR 1.4bn of Global Lines was subject to renewal, giving a total of EUR 4.2bn of renewing premiums. Renewed volume in P&C Lines was EUR 2.2bn, a decrease of 20%, while Global Lines premium volume grew by 4% to EUR 1.5bn. The overall result was a 12% decrease in renewed premium volume to EUR 3.7bn, compared with a 10% increase to EUR 4.1bn at the 1 January 2022 renewal.
P&C Lines include: Property, Property Cat, Casualty, Motor and other related lines; Global Lines include: Agriculture, Aviation, Credit & Surety, Inherent Defects Insurance, Engineering, Marine and Offshore, Space, Cyber and Alternative Solutions.
APAC Mature Markets comprise Australia / New Zealand, Japan and South Korea.
In the light of major losses sustained during 2022, natural catastrophe-exposed business came under close scrutiny at renewal, with a 14% reduction in the 1-in-250 Catastrophe probable maximum loss, which followed a 21% reduction in 2022. Measures taken included lower limits on CAT-exposed covers and higher attachment points in non-proportional covers.
The Global Lines segment achieved an overall growth in expected premiums of 4%. There was a 39% reduction in Agriculture premium volumes as the weighting of the book was shifted to non-proportional covers. Excluding this class, premium income for the segment increased by 11%, with growth achieved mainly through price and volume effects in Inherent Defects (+5%), Engineering (+21%) and Cyber (+41%, pricing impact only).
In response to rising social and economic inflation, with a regional variation which SCOR has assessed as between 4% and 14%, exposures to lines such as US Casualty and proportional Motor business were sharply reduced. Expected premiums in proportional US Casualty were down 48% and by 29% in proportional Motor.
Pricing continued to firm across most major classes, although SCOR commented that rates were still inadequate in certain inflation-sensitive lines, including US Casualty, Credit & Surety and Motor. Across the renewed book an average risk-adjusted price increase of 9% was achieved, compared with 4.9% at the January 2022 renewal, ranging from around 3% in Casualty proportional to 35% on Property CAT. Pricing for the non-proportional book increased 24%.
SCOR said it achieved improvements in terms and conditions, such as the exclusion of additional perils, higher attachment points and tightened reinstatement provisions.
Commenting on its Specialty Insurance business, which has no set renewal dates, SCOR noted continuing premium rate increase were being obtained, although the rate of increase was said to be slowing. Property lines see renewed rate momentum in the US after recent losses, and inflation is also driving higher volumes and sums insured. Price rises are continuing in Energy in response to loss experience in 2022. The picture in Casualty and Financial Lines was said to be more nuanced, with some price reductions on D&O, Cyber corrections “progressively abating”, and moderate increases in non-proportional Liability. Overall, single risk insurance and facultative reinsurance achieved 20% growth in expected premiums with an average increase in risk-adjusted pricing.
SCOR expects the actions taken at the January 2023 renewal to achieve an improvement in its net underwriting ratio of around 2.5 to 3.0 percentage points.
Underwriting Ratio is the sum of the gross loss ratio and the external expense ratio.
Swiss Re
48% of Swiss Re’s treaty reinsurance business renewed at 1 January 2023, with USD 9.0bn of premiums up for renewal (excluding USD 2.7bn of business reported on a deposit account basis and USD 0.7bn of facultative reinsurance business).
The outcome of the January renewals was said to reflect the elevated risk environment which underpinned higher pricing, and this was a major driver of growth. With a continued focus on portfolio quality and selective underwriting, the overall result was an increase in renewed premiums of 13% to USD10.2bn, compared with a 6% increase in to USD 7.8bn reported at 1 January 2022. Business which was cancelled or replaced included targeted reductions in Property (including some natural catastrophe) and Casualty lines.
Growth in renewed premiums was achieved in all major classes and across all regions except the Americas, where the outcome was unchanged after renewal. A 21% increase in natural catastrophe-related premium volume was propelled by higher rates while exposure to low attaching and aggregate covers was reduced. Growth of 12% in Property was achieved mainly in Asia and EMEA, partially offset by a cautious approach to proportional business in the light of concerns over inflation. Rate increases supported a 10% rise in Specialty premiums, particularly in Cyber, Aviation and Marine, tempered by a more cautious approach to Credit & Surety. Casualty lines grew 11%, boosted by rate improvements and underlying business growth in Asian Motor business, while a more cautious approach was taken on US Large Corporate Risks.
Swiss Re reported an overall 18% price increase across its renewed book, compared with an average 4% reported at January 2022. The increase was said to offset a 13% rise in loss assumptions, and was most pronounced in natural catastrophe, and took account of Swiss Re’s more prudent view on inflation and loss model updates. The net 5% price increase is expected to translate into an improvement in the underwriting year combined ratio of approximately 3 percentage points.
Structure and terms were said to have improved, with higher attachment points and tightened terms and conditions. The expected outcome January 2023 renewal was said to have achieved an increase in economic profitability of USD 0.8bn on the business renewed, compared with that up for renewal, from an improvement in the nominal technical result and a benefit from higher discount rates.
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