Major trends shaping Southern African reinsurance in 2024

Reinsurers want to understand where and why specific cover is being deployed; they want their cover to be valued; and they will continue to favourably support insurers writing multiple lines, as this ensures market diversity.

These were among the key insights coming out of Reinsurance Solutions Intermediary Services' (RSIS) recent contract renewal process with cedants, which revealed a number of trends currently influencing the reinsurance sector.

Understanding the coverage that markets provide has become a hot topic. Reinsurers want to understand why certain capacity is needed, and where and how it is being used when placing business.

There has also been a shift from the soft market dynamics where - to a large degree - reinsurance had become a commodity purchase. Reinsurers want their capacity to be valued, and those cedants that are actively engaging reinsurers as partners will see this pay off in the long run.

Looking back at 2023 and some of the movements shaping these current trends, the market opened with more balanced trading conditions, offering cedants improved opportunities and maintaining key reinsurer relationships.

Capacity levels were generally sufficient across all classes, with increased consistency in contract wording and structural variations. Despite overall improvements, certain geographies and client segments encountered challenges in securing market-clearing pricing and structure, particularly in the casualty sector, which faced heightened scrutiny compared to property renewals.

Following the dip in 2022, traditional capital rebounded strongly in 2023. Some markets used hardened rates and more attractive deductibles to really grow their top lines in 2023, while some opportunistic markets entered into lines for which they were not particularly known.

Insured losses from natural catastrophe events were well above long-term averages in the first half of 2023, driven by relentless and severe convective storm activity in the United States. The period also featured numerous high-profile flooding, drought and wildfire events around the world, as well as major earthquakes in both Turkey and Syria.

Nevertheless, most reinsurers posted positive underwriting results, reflecting the benefits of the shift in pricing and coverage seen in recent years. The average net combined ratio across the top 15 biggest reinsurance companies in the world, which write across multiple classes, stood at 90.4%, down from 91.7% in the first half of 2022.

The second quarter of 2023 saw the biggest deployment of cat bonds ever seen, while alternative risk transfer solutions recorded their biggest moves upward, reflecting a departure from the capacity constraints experienced in 2022.

Overall, reinsurance capacity experienced a notable 10% increase, driven by a resurgence in sector capital and robust returns, with estimates nearing 20%.

Unlike previous years that were marked by major market corrections, this growth stemmed primarily from existing reinsurers, with no new entrants coming into the market.

From a renewals perspective, smoother operations reflected a concerted effort by all parties towards market balance amidst complexity.

Key takeaways from the year in review (and what this means for the months ahead):

1. Inflation continued to drive CAT property purchases and limits.
2. Capacity rebounded well in 2023 with a strong focus on ART. This is expected to continue in 2024 as cedants look for more efficient ways to protect capital.
3. Retro supply has levelled-off. Following steep increases in 2021 and 2022, retro markets consolidated their positons in 2023. This boded well for primary cedants, which saw risk-adjusted increases in line with portfolio growth and any loss activity experienced.
4. Aggregate covers are starting to be placed again. Given the frequency of events seen over the past two years, markets are more open to this. It is anticipated that this will filter into the South African market over the next 24 months or so.
5. Deductibles remained stable in the US and European markets. Closer to home there was still pressure on cedants to increase their CAT and per risk deductibles - changes that many of the big players had already made in 2022. Last year these changes were most keenly felt in the mid-tier and UMA spaces.