Understanding the new ‘hard’ reinsurance market (2024)

January 1 is the key renewal date for most reinsurance agreements, and at the end of 2022, renewal negotiations took on an intensity not seen in decades, as reinsurance companies demanded significant price increases, thereby eroding many years of price decreases in the market in one go.

This rapid changing of the market dynamic has led to insurance companies raising premiums and reducing risk appetite. A hard reinsurance market can therefore be summarised as a general market condition where the availability of reinsurance coverage is limited, and the cost of that coverage is high. Several factors have resulted in the new normal standard including an increase in natural disasters, exposure to Russia’s war in Ukraine, increasing inflation, supply chain shortages and an overall greater demand for reinsurance, as well as a decrease in available reinsurance capacity.

“Reinsurance sets the framework for what the market allows insurers to do. If Insurance, like all other significant insurers, has large and complex risks that are dependent on the support of the global reinsurance market. Regardless of what happens just in the Nordics, we are, per definition, affected by all the increasing claims that we have seen globally due to significant fires and weather-related events,” says Erik Nordblom, Head of Reinsurance at If P&C.

“I think the reinsurance market is now fundamentally different in the sense that the reinsurers have finally had a chance to do what they have wanted to do for multiple years, and that is catch up on severely inadequate premium levels. There was a long stretch of time where a new supply of capital entered the reinsurance market and the fundamentals of supply and demand meant that it became artificially cheap.

But the situation has changed, and the reinsurance market now needs to price themselves more adequately. Now that there are higher returns to be made in the fixed income market due to increased interest rates, then reinsurance is no longer so attractive for investors, as it's increasingly volatile, and the profits have been poor in recent years. Significant amounts of capital move to safer and better paying investments, and with less capital and thereby less capacity available, prices go up. It's a very simple supply and demand equation”, Nordblom explains.

The hard market requires that risks are comprehensively explained - both in words and numbers. To that end, no insurance or reinsurance company is now taking on unknown risks. Information and transparency are still considered king and a catalyst for establishing trust – all the way through the chain from company, to insurer, to reinsurer.

After adjusting for growth and inflation, essentially everything in the property risk and catastrophe space in early 2023 has increased by around 20-40% in the Nordic market. This is due to the new landscape being uncertain and characterised by increasing deglobalisation, the statistical likelihood of more frequent, and more destructive climate-related natural disasters, rising interest rates, greater recessionary risk, structurally higher inflation, supply constraints, and more.

Nordblom concludes that “it’s important that companies feel safe with us, but it comes for those willing to work with their risk management together with us. For the next few years, there’s not going to be an easy ride for anyone. We stand strong as we show our reinsurers that we rest on the strong fundamentals of technical underwriting and risk management. We have the capacities, the competence, the ability and the willingness and we have been consistent in our underwriting and how we do business. And that has enabled us to grow with our Nordic base, and our reinsurers believe in what we're doing, and they are still happy to support us, albeit with higher prices than before.”