Upstream energy: The quality gulf widens

An uneventful reinsurance renewal season

Compared to last year, the 2024 reinsurance treaty renewal season was decidedly benign, with most markets seeing flat renewals or small rises in their reinsurance protections.

The increased treaty retentions that were imposed by reinsurers during the 2023 renewals have clearly borne fruit during the last year and protected treaty reinsurers from picking up most of the direct losses. Whilst this strategy proved to be successful in protecting the treaty account, direct insurers have felt the pain of this change. This is especially the case for those markets writing a book of smaller accounts where treaties are now much less likely to be exposed due to the size of the insured values and the carrier’s line size. Additionally, signed lines on the most favoured business have been reducing due to increased competition for market share and this has also reduced the proportion of a market’s line which is protected by its reinsurance treaty. As a result, a number of direct insurers had their worst net results in a decade in 2023, despite there being no major losses in excess of $1 billion.

Theoretical and realistic capacity levels for operating assets remain stable at record high levels.

It appears a new baseline of treaty retentions has been established and there has been no sign of retention levels coming back down again, much to the dismay of direct carriers. We have seen markets respond by carefully reviewing the deductible levels on direct placements and, in some cases, pushing to increase deductibles they deem insufficient. It remains to be seen whether markets will be successful in achieving any increases in deductibles in the competitive market environment in which we currently find ourselves or whether they will need to continue to bear the exposed gap with their treaty protection.

The large loss that didn’t move the market

However, despite all of this, many markets still made money in 2023, primarily due to another fairly benign year on the loss front.

As anticipated in our November update, further 2023 loss activity has now materialised in the above statistics. However, despite there being two large losses totalling at nearly $1 billion between them, the market does not appear to have hardened as a result.

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