A “hardening” reinsurance market – How to mitigate the adverse impact

For several years, the insurance industry has been anticipating a hardening1of the reinsurance market, which last occurred in the early to mid-2000s [1]. Soft market conditions have prevailed for nearly 15 years until 2020. The COVID-19 pandemic was arguably the final harbinger for what appears to be a hardening of the reinsurance market.

This comes after the industry had been facing a compounding of factors that contributed to a hardening market over time. This article discusses the drivers behind the hardening reinsurance market and notable observations from recent reinsurance policy renewals, and importantly focuses on steps that can be taken to mitigate the adverse impact of the hardening market from an insurers’ perspective.

Hardening reinsurance market

Notable observations

Recently, reinsurers have been more conservative with their underwriting.

Income generated from investment returns were eroded in the low interest rate environment, so reinsurers have been extra cautious in their underwriting to generate adequate returns on capital. This was particularly evident on proportional treaties because they are linked to the direct insurers rates, which have always been viewed to be competitive.

The overall risk adjusted reinsurance rates increased by a moderate 5% on non-proportional treaties in January and April renewals in 2021 [2]. Insurers with better treaty performance generally had a cost advantage with lower rate increases, while insurers with adverse treaty performance were hit particularly hard with substantial rate increases.

Insurers with unfavourable loss experience to their treaties particularly needed significant changes to their reinsurance structures to manage price increases at acceptable levels.  In some cases, drastic steps were taken to drop lower layers of reinsurance. For example, in one case, the deductible increased by 50% because of they dropped the bottom layer.

Some reinsurers’ preferences have also changed with greater appetite for higher loss-free layers compared to supporting lower layers with high loss activity and aggregate layers covering attritional losses. In some cases, reinsurers asked for higher Minimum Deposit Premiums (MDPs) to negate the impact of possible underachievement of premium income applicable to treaties under volatile market conditions. However, reinsurers showed some signs of flexibility with premium payment deferments and allowing instalments.

The reinsurance renewal process in January and April took longer than usual. The process had been slow and more complex at these renewals as reinsurers followed strict underwriting guidelines and scrutinized treaties closely. Terms and conditions of treaties were tightened by introducing new exclusion clauses. Commonly incorporated clauses include exclusions on communicable disease, cyber and acts by government officials.

Even though there was a slight increase in reinsurance capital from 2019 to 2020 [3], reinsurers continued to be wary of capital allocation to high-risk markets especially to those with high natural catastrophe exposures.


This section discusses in detail, the key factors that attributed to the upward movement of reinsurance pricing.

Emerging and high uncertainty of COVID-19 related losses

As of April 2021, publicly reported COVID-19 related losses and loss reserves for both insurers and reinsurers stood at USD$35.76 billion [4]. Losses related to the pandemic are expected to develop further in 2021 with a higher degree of uncertainty putting upward pressure on pricing.

Elevated Catastrophe Loss Activity

The global insurance industry’s insured catastrophe losses amounted to USD$83 billion in 2020, making it the fifth costliest on record [5]. USD$76 billion were from natural catastrophe events, 70% of which were due to severe thunderstorms and wildfires in the US as well as other secondary peril events around the world.

The proportion of losses covered by the insurance industry continues to increase. As shown the chart below, 44% of economic losses in 2020 were covered by the insurance industry, up from 42% in 2019 and the 10-year average of 37%. Most of these insured losses are passed onto reinsurers.

With rising concerns on climate change, there is greater uncertainty around losses from secondary peril events (typically weather related) in 2021. The potential for increased loss activity have put upward pressure on pricing.

Deteriorating liability losses

Loss frequency and severity for liability classes have been trending up. Social inflation2 has been driving up losses over the last few years, putting upward pressure on pricing and limiting the amount of available capacity. Moreover, adverse loss development from prior years have also contributed to upward price pressure.

Fading investment returns

A prolonged low interest rate environment has significantly reduced reinsurers’ investment incomes. To compensate for the shortfall in investment income and to generate return on capital, reinsurers required higher underwriting profits, putting upward pressure on pricing.

How to mitigate adverse impacts of hardening reinsurance market

Renewals in January and April have shown there are several areas that can be considered to mitigate the adverse impact of a hardening reinsurance market. The following section covers these in detail.

Data quality

The data quality has always been and will be paramount for the policy renewal process regardless of the stage of market cycle the reinsurance industry is in. However, the hardening market has put more emphasis on the data quality. Reinsurers tend to penalise insurers for poor data quality as they would have to deal with information asymmetry and more uncertainty within the pricing analysis, which inevitably add to further price increases on top of any hardening rates. Therefore, improving data quality is a vital first step to dampen the adverse impact of a hardening reinsurance market.

Reinsurance structure changes

Reinsurance structures have come under more scrutiny than before. The following are some measures insurers can consider to reduce price increases on risk adjusted pricing.

Increase in deductible

Increasing the deductible of non-proportional reinsurance can provide reinsurance cost savings. With an increased deductible, insurers retain more working losses. A proper cost-benefit analysis is always recommended to find an appropriate level of retention.

Introduce cost saving features

Apart from increasing deductibles, insurers can also consider other cost saving features with their non-proportional reinsurance. One example is an Annual Aggregate Deductible (AAD) under which insurers retain more losses (up to the annual aggregate deductible limit) before subsequent losses can be recovered. Insurers with the intention of maintaining their expiring levels of deductible but looking for cost savings can consider introducing an AAD feature.  

Loaded reinstatements

With non-proportional reinsurance, an insurer pays an upfront premium for coverage. One of the components that determines upfront premium is the reinstatement factor, which is used as a discounting factor (the higher the reinstatement factor, the lower the upfront premium and vice versa). Typically, the reinstatement factor is set at 100%, which implies that reinstatement premium3 is 100% of upfront premium. To provide cost savings with upfront premium, the reinstatement factor can be set above 100% to have a greater discounting effect. This measure is particularly suitable for reinsurance programs having loss free experience.

Option to buy additional cover only when needed

Insurers targeting growth in their portfolios need to cater for possible growth in risk exposure. This in turn requires increased protection with reinsurance coverage. For example, the growth in exposure to catastrophe risk of property classes may require increased cover limit of a non-proportional coverage. With uncertainty in market conditions created by the pandemic, it may be challenging to achieve growth expectations. Therefore, instead of purchasing an increased cover limit at the start of coverage, insurers can opt for such an increase midway depending on the growth achieved.

Separation of layers by loss type

With non-proportional reinsurance, layers can be separated by loss type (i.e., risk only or catastrophe loss only layers). This is particularly beneficial when there is no loss experience from a particular type of loss.

Multi-year deals to lock-in pricing

In a hardening reinsurance market in anticipation of further rate increases in the future, insurers can consider multi-year structured deals. Typically, reinsurance coverage is purchased on an annual basis. However, with a multi-year deal, coverage is purchased for more than one year (e.g., for two or three years) with price fixed at the start of the deal. Such deals also incentivise insurers for favourable loss experience at the end of the deal by sharing profits through profit commissions.

Revise Event Limits, Commission terms, and other features

With proportional reinsurance treaties, finding reinsurers to support has become difficult in certain markets as some reinsurers withdrew support or reduced capacity. Insurers with adverse loss experience in proportional treaties may find it even more difficult to find support. Therefore, to deal with such situations, changes to coverage terms and conditions may be required. Some measures include lower event limits for catastrophe losses, reduced commissions and the introduction of more onerous clauses on insurers such as Loss Participation Clauses4 (LPC).

Closer engagement with brokers

A closer engagement with reinsurance brokers has never been more critical than now in the current market conditions. Insurers can leverage on the analytical services offered by brokers to optimise their reinsurance structures to provide cost savings with optimal coverage.

Brokers have deep market knowledge and close relationships with reinsurers, which can benefit insurers. They can identify quoting reinsurers who have shown interest and provided competitive pricing in the past renewals and collaborate with them to find out their willingness to support. Brokers can engage with existing reinsurers in insurer’s panel and if required, secure additional capacity in case of a shortfall in coverage. There are reinsurers planning to enter new markets or looking for growth in certain markets. Brokers are in a better position to identify and engage with them for support.

Start early

As mentioned earlier, the entire reinsurance renewal process in January and April was longer than usual. Therefore, it is prudent to start the renewal process early. An early start allows more time for reinsurers to analyse and price, brokers to negotiate with reinsurers on pricing and terms and conditions, and to find support for reinsurance coverage. The last thing an insurer wants is a shortfall in reinsurance coverage.


After experiencing nearly 15 years of soft market conditions, the reinsurance market has begun to harden. Many factors have contributed to the hardening. The hardening market is expected to prevail for several years. To mitigate the adverse impact insurers can take steps. Some of these steps include improving the quality of renewal data, possible reinsurance structural changes to provide cost savings, a closer engagement with brokers and an early start to the reinsurance policy renewal process.


1- Soft market in the reinsurance industry refers to low rates, wider coverage, more relaxed underwriting criteria and higher reinsurance capacity. On the other hand, hard market refers to higher rates, stricter underwriting criteria and lower availability of reinsurance capacity. Read more.

2- Social inflation refers to the trend of rising insurance claims due to factors such as increasing litigation, plaintiff-friendly judgements, wider liability definition and higher jury awards. Read more.

3- Reinstatement premium is the premium that must be paid to restore a layer fully or partially after a recovery from the layer.

4- Loss Participation Clause (LPC) requires the reinsured to share a proportion of the treaty loss if the loss amount exceeds an agreed loss ratio. Read more



Special Note:
Authors would like to thank Mudit Gupta (FIAA) for reviewing the article and providing invaluable feedback.

CPD: Actuaries Institute Members can claim two CPD points for every hour of reading articles on Actuaries Digital.