Fitch Ratings has observed that the bargaining power turned in favour of reinsurers during their January renewal negotiations with cedents.

Fitch said: “Most notably, property and speciality lines entered into a hard market. As a result, Fitch Ratings expects underwriting margins after retrocession to expand by four percentage points on average in 2023.”

This was owing to significant price rises, tighter terms and conditions and the withdrawal of cover related to the war in Ukraine.

The higher prices were spurred by losses due to the war, high inflation and increasing natural catastrophe claims.

Price rises were particularly steep for property and speciality reinsurance cover. Most property reinsurance markets saw price increases of 20 per cent to 60 per cent following large natural catastrophe losses in 2021 and 2022.

Losses from Hurricane Ian in Florida contributed to the doubling of some prices in the US.

Retrocession prices also moved up.

Among speciality lines, political risk and aerospace saw large price increases of 50 per cent or more, driven by losses from the war.

But there remains a continuing question on how the (re)insurance industry can finance future natural catastrophe risks. Some reinsurers have withdrawn part or all of their capacity to reduce earnings volatility.

The Florida market is a glaring example as fraud and litigation have made it increasingly unattractive. State legislative action has been taken to address it, including the increase of state cover by a billion dollars.

Fitch said: “Other countries, including France and Spain, have long-established state-sponsored backstop facilities to support the private (re)insurance industry in case of extreme natural catastrophe events. We believe other countries will follow suit in the medium to long term as natural catastrophe events become more frequent and severe, while the alternative of imposing mandatory insurance covers on households remains unpopular.”

Fitch estimates that last year a series of secondary peril events across North America, Europe and Australia, and hurricane Ian in Florida caused insured natural catastrophe claims of about $120 billion.

This would make 2022 the third-costliest year, after 2017 (hurricanes Harvey, Irma, Maria and Nate) and 2005 (hurricanes Emily, Katrina, Rita, and Wilma) for the (re) insurance industry with respect to weather related events.

It was more than 60 per cent above the 10-year average based on data from the Swiss Re Institute.

Hurricane Ian, which hit Florida in September, accounted for around 40 per cent of the total, making it one of the costliest natural catastrophe events ever.

Secondary peril events, such as flooding in Australia, hailstorms in France and winter storm Elliott in the US, contributed significantly to the insured tally.

Climate change and the increase in value of insured goods on the back of high inflation and wealth creation will continue to drive natural catastrophe claims higher in 2023 and beyond.

Cedents found it increasingly difficult to place natural catastrophe risks with reinsurers raising the question of insurability of property catastrophe risks during the January 2023 renewals process.

Meanwhile, Fitch said: “We estimate that the reinsurers’ aggregate accounting capital base declined by around 15 per cent in 2022 largely due to markdowns on their fixed income portfolios on the back of rising interest rates.

“This is likely to have reinforced reinsurers’ underwriting discipline despite higher interest rates having a neutral to positive impact on economic and regulatory capital in 2022.

“In 2022, capital inflows into the alternative capital space remained below the levels seen in the previous two years. This negatively affected capacity in the retro market and added pressure on rates.

“Disappointing returns for the past five years and the risk of trapped capital led to outflows in collateralised programmes in favour of catastrophe bonds. However, Fitch expects capital inflows to accelerate in 2023 as trading conditions improve.”