Our panel of experts discuss how the multi-geographic renewals played out this year and which common challenges cedants faced and uncover some of the more region-specific considerations. This episode features Gallagher Re’s Dan Robinson, Heather Bone, Dirk Spenner and Kyle Stetner.
Charlie Thomas: Hello, and welcome to the latest in Gallagher Re’s series of post-renewals podcasts, where we go beyond the headlines of rate movements, T&C tussles and retention levels and investigate some of the reasons as to why the renewal played out in the manner it did, what lessons can be learned, what we might infer for future renewals, and the difference that the reinsurance broker made for their clients.
The July renewals are always an important date in the reinsurance calendar and this year was no different. We saw a continuation of the pricing and structural market dynamic that defined the January renewals, although these mid-year placements were markedly less stressful than those at the start of the year, with adequate capacity available to support client needs.
In addition to some new or returning capacity coming to market, there was also a moderation in demand from buyers, through a combination of increased retentions and deferral of purchasing additional limit.
To kick us off, I asked a number of Gallagher Re colleagues to give me their high-level takeaways of how the renewal ran this year, for them and their cedants.
Up first is Dirk Spenner, Managing Director for EMEA.
Dirk Spenner: It's been a very interesting mid-year renewal which was, by and large, defined by what we call continuing discipline. And that was a follow up and in-line with the pricing and structural market dynamics that we observed on the 1st of January 2023 renewal. However, what we've also seen was a market that was less overall stressed, a market that processed in a more orderly and rational way, and in the main, with the obvious exceptions, one that was able to offer adequate capacity, so that we all had a more regulated renewal, and not this sort of very sort of distressed renewal that in particular Europe has seen, and North America's seen, at the end of last year.
CT: Taking us to the Southern Hemisphere next is Heather Bone, CEO for Gallagher Re in Australia and New Zealand.
Heather Bone: Yeah, at a high level, I think it was successful. I mean, from an insurance perspective, the essential cover was placed within budgeted prices. And from the reinsurers' perspective, the target of structural changes that they wanted, and the price rises that they were looking for were largely achieved. We did see the property cat renewals running pretty late. And we saw more demand from reinsurers to leverage other classes of business against that property business.
But I think, what I thought was really interesting with this renewal, is we're now sort of nearly a year into this harder market piece, and we've seen the board or management of companies really critically look at their reinsurance purchases and question whether reinsurance is the most effective capital instrument at this point in time. And so, I actually think a lot of companies are concluding that they should be supplementing their reinsurance with different forms of capital to manage their risk, and particularly as the rates and the coverage aren't necessarily meeting their appetites. So we are starting to see a little bit of a drop in demand for reinsurance. And then in contrast, both the traditional reinsurers and the ILS markets are now getting the rates and the structures that meet their appetite, so we're starting to see an increase in supply. So I think it's going to be really interesting to see how that dynamic plays out over time.
CT: When compared with the year before, while the market hadn't yet had to digest Hurricane Ian, which landed at the end of September, there were signs of natural catastrophe concerns, given the heavy flooding Australia had experienced that February and March. Inflation had also become a hot topic for 7.1.22 and while clients weren't actively seeing it impacting their portfolios, everyone across the value chain could sense that it was coming. Here's Heather again:
HB: This time around, we've got insurers being in a position where they're much clearer on the economic trade-offs between buying reinsurance and retaining the risk themselves. And so they're able to make much more deliberate decisions this time around relative to the last renewal.
From the traditional market perspective, we saw reinsurers wanting to move up programs — moving away from frequency basically. So anything that had a frequency element to it, whether it was sideways cover, whether it was low layers of cat programs, even the per-risk covers, we were seeing a lot less appetite from the traditional reinsurers.
We were actually, interestingly, seeing quite a lot more appetite coming in from new markets or from ILS on some of that lower layer coverage, because the rates were obviously pretty attractive compared to where they might have been in the past. And so we're also seeing quite a lot of pressure in that middle section where everybody wanted to play, where everybody kind of felt comfortable. And they wanted to still be able to deploy as much capacity as they used to, but in a more compressed part of the programs. So we were getting quite a lot of competitive tension in that regard. And, you know, the ILS markets were also quite keen to come into that space. So we've seen actually quite an abundant supply of capacity, I suppose. But just not always, at a place or at a price that the market wanted to have that capacity fully deployed.
CT: Talking us through the UK and Ireland perspective is Dan Robinson, executive director at Gallagher Re.
Dan Robinson: In terms of a high-level overview, I'd say it was very much in line with our First View. In so much as the market was stabilizing, reinsurers were getting their retro deals completed in first and second quarter, so by 1st of July, they knew how much aggregate they had to deploy, which made life a lot easier for them and a lot easier for us.
It wasn't a case of 'I don't even know if I'll be able to renew your line,' as it was at 1.1, it was, 'We're happy, we can renew, and we've probably got a little bit of space to grow.' So the supply/demand dynamics were easing [compared with] where they were previously. Pricing wise, it was still first time, first of July buyers were getting this new hard market imposed upon them, so we did have to have some significant rate increases. But I'd say it just felt not quite as it was at 1.1, probably because of the supply/demand economics I'm talking about and the stabilization of the market. Maybe if a client would have paid 35% rate increase at 1.1, it may have been 30% at 1.7, so it was significant, but not quite as bad as it was in the mire of 1.1.
CT: As with Australia and New Zealand, last year at the mid-year renewals, reinsurers were starting to consider how bad the inflation question might get but were not quite ready to build it into their models, whereas this year it was front and centre of UK cedants' discussions with their reinsurance partners, particularly given the stubborn nature of UK fiscal inflation.
Indeed, while the hardening rates were leading to some international cedants to temper their demand for purchasing additional limit, the same wasn't necessarily true for UK buyers.
DR: Not so much in the UK, because the market in the UK has been so soft. For so long, that pricing is still quite attractive to buyers, it hasn't reached levels where the economics don't work anymore. So people were continuing to buy more limit, because inflationary factors are driving that—cost of living is going up, the loss is going to be bigger. So, UK specifically, they didn't stop buying reinsurance, if anything, they bought a little bit more.
CT: Switching over to the US, here's Kyle Stetner, EVP at Gallagher Re, who looks after regional clients from our Seattle office. Kyle explained that for clients in the Western US states, the main concern for their reinsurance coverage was cat placements, and in particular given the geography, wildfire.
Kyle Stetner: At 7.1, we saw most programs that have wildfire exposure under pretty significant pricing pressure, I would say slightly less than what we saw at 1.1. But massive increases, risk adjusted up, you know, 20% to 40%, certainly anything that was loss impacted was at the higher end of that. And really the item that challenged our clients the most was the increase in retention. So really moving away from capacity being there for earnings covers, or even not earnings covers, but lower attaching cat layers that have some frequency, that capacity really went away. And that's included in comments that supported programs for 10 plus years. So that really forced a lot of our clients to take a new look at their coverage and how best to spend their dollars, ultimately resulting in them bumping up their programs on both per risk and cat programs.
CT: That increase in retentions proved challenging for some cedants to swallow, given that, for many, their retentions hadn't been altered for as much as 10 years. And the increase they were being asked for wasn't a small one; in some instances, cedants were required to triple their retention.
Rising retentions were of course a common theme across many geographies this year. And that isn't expected to change in the short term.
Here's Dirk Spenner again:
DS: I think there's some subjects that are still carrying on. And retention levels is one, clearly on the property classes in, in combination with inflation where reinsurers have really sort of stood firm and put a hard line out. There'll be certain elements of minimum rate on lines at the top end of programs, which we saw a significant increase in recent renewals up to a level of where reinsurers felt comfortable. And then there is a number of local actions that sort of played a dominant role in the, in the specific renewal of those programs.
But I would say overall, its retention levels, it's the reaction on inflation, and in a number of areas, unsustainable proportional treaties that needed to be replaced by gross risk XLs, which again provided a significant challenge to our clients to then in effect fundamentally, changed their business model overnight. And that really sort of described a number of the other renewals that we're seeing.
CT: Returning to the US, Kyle explains how the team worked hard to think innovatively about how to best help clients with that, such as structuring covers that incepted at second or third events, to help ease some of the frequency-related risk.
KS: You know, it's one thing to say, hey, you've got to double your retention. And you can do that for one event. And even if you typically haven't had the frequency [challenge], for companies to go back to their board and say our retention is doubled across the board for all events, that represents a potentially significant impact to their policyholder surplus at the end of the year, if they've been able to lock in a cat loss ratio of 'X' and now it's three times' 'X' potentially at the end of the year, that that really changes their ability to write the same amount of business in the way that they have been. And I think a lot of clients where we saw people perform the best at 7.1 were those that had a clear plan in managing aggregates. So how can they address this on their end? And maybe there is a stop gap of second event drop down, third event drop down that kind of serves as a bridge until they get things more in order on their side, but state limitations on how fast you can get off certain segments of business or add more rate to it, it's not keeping up with how fast the reinsurance markets moving. And so I think it has put, especially smaller regional carriers where they have a very focused geographic area, I think it's putting them on under a lot of stress in the last 12 months.
CT: Kyle went on to note there were two major differences between the mid-year renewals in 2022 and this year.
KS: I think this year, at 7.1 there were two things really stood out to me: one was a willingness for longtime supporters to walk away. And so that wasn't a case where somebody might cut their line from 10 to 5%, it was [more like] take it or leave it. And the other thing was pricing—pricing was up significantly. Last year at 7.1 I would say a lot of our regional renewals on the West Coast were maybe up around 10%. But we're seeing that up more like 30-ish percent on average now, so a pretty fundamental shift in pricing increasing—that 30% is on top of the 10% last year. So, I do think that clients have asked, is this going to continue? Like, how do they go about setting rates on their end looking towards the future and not just trying to play catch up from a reinsurance expense standpoint?
CT: Much of that rate increase was driven not by a lack of capacity available but by a tempering of appetite by reinsurance markets.
KS: I would say there's maybe a capacity shortage at the very bottom end of programs, but it's not really a capacity shortage, it's an appetite shortage. Once we get into layers that attach and say, a 1:10 year return period or higher, we found there was ample capacity, at least for the regional business, and we had new entrants coming in, kind of throughout, which helped offset some of the pullback. But it really was that lower end of towers where there was, you know, we could say, hey, at not at any price, but any price that makes sense, you're not going to get enough capacity here. But once you get above, say at 1:10 year return period, you know, I think that the market was much more measured. And everybody was open for business from what we saw at that point.
CT: That new capacity Kyle referenced was both returning capacity from traditional players who had pulled back last year, but also new-new capacity where some reinsurers had closed down their property offerings, and those underwriters had found new jobs at regional carriers in the Midwest or the Northeast which were keen to find some geographic diversification.
KS: I would say there are three or four companies that came in and added some significant capacity to programs where some of your more traditional long-term supporters had pulled back in a way. So that was a good way of alleviating some of the pricing pressure that we were seeing. So not, not truly, you know, massive influxes of capital into the market, but enough at the margin to make a difference in final terms.
CT: One other common theme which transcended a few geographies was the ability for cedants to buy some additional capacity at the mid-year renewals, outside of their normal renewal cycle, because they were now able to strike capacity deals at the top end of their programs that were more suitable than they had been in the more tumultuous period at the beginning of the year. Here's Dirk Spenner again.
DS: Many cedants have a relatively prescriptive and organized renewal calendar and so from that perspective, to do something extraordinarily early is often something that doesn't suit the internal needs and the ability to go organized to market, so from that perspective, I'm sure everyone wants to have an earlier renewal and earlier firm order terms than what we've seen at the end of last year, where there was really a sort of stalemate between buyers and sellers throughout November, and then it all happened in a rush in December. So that's certainly something we want to avoid.
I think people also want to make good use out of the key market events that we will see in September and October, whether it's in Asia, and in particular Monte Carlo and Baden Baden, which again, last year felt a little bit like they didn't provide any guidance or any help for an orderly renewal and [we're all] looking forward to really sort of making the most out of that this year.
CT: Down Under, however, cat limit demand was somewhat mitigated by the introduction of a new cyclone pool, which the larger insurance companies had to go into at 7.1 or 1.1, bringing the overall amount of limit needed down. And in New Zealand the Earthquake Commission, Toka Tū Ake EQC, doubled the amount of coverage it provided at the bottom of the loss curve from last October to NZD300,000, meaning NZ carriers didn't need as much limit either. Here's Heather Bone to explain a bit more.
HB: So it was a very interesting challenge in this market, where reinsurers and companies were each trying to work out how much credit or how much reduction should be given through the fact that either the limits were coming down, or a major peril was being taken out of what they purchased. And you know, for many Australian companies, tropical cyclone is the peril that is driving their probable maximum loss. So that would be quite significant and bring the number down. But reinsurers were obviously feeling the strain of having a very well modelled peril coming out, and then having more of the potential losses being driven by less well modeled perils, where there's a little bit less certainty from their perspective. So, yeah, there was certainly more than enough capacity at the top, but reaching a sort of comfortable price point was definitely a challenge.
CT: That's all we've got time for in this episode but keep an eye out for second episode which looks at the 7.1 renewals, where we delve into more detail around some of the regional considerations at play in this complex, multi geographical renewal and uncover how the reinsurance broker made the difference at successfully getting placements home.
Until next time, thanks for listening, and don't forget to subscribe!
