In this episode, we learn more about some of the geographical quirks which presented cedants and our brokers with unique challenges during these the mid-year placements, and discover how our brokers made the difference in getting placements home successfully.
This podcast 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.
I'm your host, Charlie Thomas, and in this episode, we continue to uncover what happened at the 7.1 renewals.
In our last episode, we set out the stall in terms of understanding the major developments during the mid-year renewals across a plethora of geographies, each with their own unique considerations.
In this episode, we're going to delve a little deeper into some of those unique challenges presented in those geographies, and how our reinsurance brokers made the difference.
So, what were some of the specific challenges that cedants faced at 7.1 this year?
To kick us off, here's Dirk Spenner, EMEA managing director. Among the pressures he saw globally included the pressures on minimum rates on lines, attachments points and proportional treaties. More generally he spoke of the challenge of aligning expectations and points of acceptance between cedants and reinsurers when it came to getting placements home.
Dirk Spenner: Finding the right pricing levels to be able to get their programs home, in marketplaces where, in a change to previous renewals where reinsurers are not necessarily all bound to, market terms and where they all want to cut out specific conditions, whether this is on clauses or pricing on reinstatements… And so that market making and finding, finding the right point where you can bind your reinsurance partners, on to the same terms of conditions, I think that is probably still an ongoing challenge and was seen to an extreme at the 1.1 2023 renewal.
Here's Kyle Stetner, EVP at Gallagher Re, who looks after regional clients from our Seattle office, to explain some of the hot topics for regional US carriers at these mid-year renewals.
Kyle Stetner: Yeah, I think for the Western US, 90% of the talk is about wildfire in aggregate management and do you trust the models that are out there? Are they representative of your historical loss patterns? And so, for us, I think where we were able to add value is working with clients to identify a strong strategy around wildfire, hazard recognition, accumulation management, and then going about communicating that to their reinsurance partners. So it at least gives their counterparties an idea of what's taking place from an aggregate management standpoint, because for most western states, you're not going to get away from wildfire exposure. So it's something you're going to have within the portfolio and how you manage that is the key and differentiating from Portfolio A to Portfolio B.
I would say marketing started earlier, for sure, a lot more conversations throughout, I would say, you know, if we had significant conversations—making these numbers up—but with 20 markets on a renewal last year, we were talking to 30 to 40, with you know, more in depth marketing conversations this year. So started earlier, trying to cast a wider net. That didn't mean that placements got done any earlier, I think it just really prolonged the whole cycle. But there was a lot more back and forth with markets and trying to make sure they understood how each individual company is going about any changes that they're doing to the underwriting of their book. Additionally, with some of the new entrants, it was really important to get them comfortable with companies they, you know, had met with for the first time and are just seeing the portfolio for the first time. So, I would say we spent a lot more time having more in-depth conversations rather than sending this mission and having a high-level conversation with markets.
CT: The casualty market also prompted some deep consideration at this year's mid-years, particularly when it came to some of the upper layers of towers.
KS: Yeah, I think it really goes back to what is your view of social inflation and are larger casualty claims from eight years ago representative of what you think that could be for the same type of loss this year, given the legal environment, the prevalence of higher verdicts when juries come back with higher awards? And so I think that that both from a reinsurer and from a primary insurer or carrier standpoint, it seems like that's the big question.
So, we see a lot of our clients trying to reduce their limits that they're offering [to customers]. But then reinsurers are also saying, hey, they've got to limit the downside on some of this because they, drawing parallels with the property side, it does seem like we're starting to get a better understanding of what inflation looks like from a rebuilding cost standpoint. And the social inflation question seems to be the big question that remains out there. So I do think that we saw more markets pull back wholesale on some of our higher casualty placements than we did in the property [space] I think we could find a price. On some of the casualty placements, it was more of, hey, we're not reading that type of structure, right now we're taking a pause, because we don't think we have a good handle on what social inflation looks like.
CT: One consideration for UK buyers was the rather abrupt change in climate experienced during the winter, where a large proportion of the country went from experiencing minus 10 degrees Centigrade for several days, followed by a rapid heat increase to around plus 20 degrees Centigrade almost overnight.
Dan Robinson: That caused many of these cold-water storage tanks in rubes across the UK to crack because it just couldn't handle the change in temperature. And many properties were flooded quite severely—the tanks in the roof—it doesn't make sense to put the tank in the roof but they are - they're not insulated rooms, you keep the insulation below the tank, so the heat stays in the house that attics freezing, the tank cracks and it flooded houses which caused significant losses and initial loss advice to the market was of a nature where people weren't really hitting their cat XLs in the UK. But subsequently, in sort of towards the end of q2, people were having to increase those significantly. So now there's quite a large number of cedants that have had claims to their cat XLs so for the first time in a while the UK has had some reinsurance recoveries and having to kind of pay a little bit of post loss pricing as a result. So that was a little bit unique to the UK market. And that has knock on effects on what coverage reinsurers are prepared to give for freeze.
Currently, it's 504 hours you can add everything up in 504 hours in the aggregate. We managed to achieve that for the most part maintaining it we'll have some clients that were forced to trim that back a little bit. So that was probably point 1.
Point 2 in the UK—prepaid reinstatements have been very popular in the UK for many years. It gives you good solvency relief on your SCR. The market has been pushing very heavily to make them paid reinstatements as it benefits them post loss. But I wouldn't say that was universally accepted. And I can come on to why that would be. But that was another dynamic that you get, particularly in the UK that you don't necessarily get elsewhere.
And I've also touched on this already, but the hours clause is also quite an important factor in our discussions right now with market trying to reduce the soft market, where you could add everything out within three weeks and just say as one loss regardless of how many wind storms, floods, or whatever the event is, and they're trying to ring fence it back to one windstorm, one loss, one flood, one loss. So that's a dynamic playing out right now in the UK market as well.
CT: But arguably the biggest challenge facing UK cedants is one that impacts a few other geographies too – the fact that in many Lines of Business, the increase in primary rates is simply not keeping pace with those in reinsurance. Here's Dan again:
DR: I'd say the majority of buyers in the UK are not seeing the rate increases on the front end, certainly not on the personal lines as they are having to pay on the reinsurance. So very simple, the biggest challenge they had was trying to find the money to pay a 30 plus percent rate increase on their reinsurance when their front-end rates aren't going up anywhere near that much. So, they've had to release reserves and find money down the back of the sofa to pay for this reinsurance and, and they're now having to actively put up their front end pricing. So we're seeing the reinsurance rates driving the insurance rates for the first time in a long time. And that's therefore allowing them to pay for the reinsurance purchases at 1.1 on beyond going forwards.
CT: In our last episode, we talked about the introduction of the new cyclone pool for Australia, and the Toka Tū Ake EQC in New Zealand. But as Gallagher Re Australia and New Zealand CEO Heather Bone explains, there were regulatory changes to consider too.
Heather Bone: So there'd been a change in our region called GPS 230, from our regulator, APRA, where basically, the reinsurance wordings and contract certainty had to be secured much earlier than in the past. So that meant a lot more pressure on companies and reinsurers to make sure that we in what was actually a late renewal because of the difficulties with, you know, the hardness of the market, we needed to actually nail down those wordings and get complete contract certainty by day one.
So, it was a little bit of an administrative challenge, but I think everybody rose to it well, and you know, all of the global reinsurers understood what that challenge was, and came to the party, which was really good.
CT: Property frequency concerns also led to a lot of debate, as Heather explains.
HB: The main challenge was basically anything where property frequency came into play. So bottom layers of programs prepaid rent statements, pressure on retentions, cat exposed per risks, and the sideways covers, anything with frequency risk involved with it became very difficult for them. And, you know, that's what the reinsurers are all trying to pull away from. But you know, that's what companies have traditionally been able to manage some of the volatility through that reinsurance relationship. So that became really difficult.
CT: As always in these episodes, we like to uncover the value of the reinsurance broker during these renewals, and so we ask our participants to shine a light on some of the examples of how the broker made the difference this year.
First up is Heather Bone:
HB: I think that I think there were a number of factors that were really important. I think that was early engagement with clients, it was strong relationships with reinsurers and making sure we understood early what they were trying to achieve. It was having access to new markets, and, you know, really collaborating around the globe to understand where those new markets were, and where capacity could be sourced, lots and lots of modelling to make sure that we had really robust technical arguments to take to the reinsurers, and a lot of Plan B's. But I think all of that was a product of this sort of through client advocacy approach that we take where, when we work with our clients, we try and work more holistically than just their reinsurance program, but actually looking more broadly as to what they're trying to achieve as a company, and how we can draw upon expertise from around the globe to help them achieve that.
And when you're able to operate with that big picture as your starting point, I think it is easier to be able to get them an outcome that works for them because you know, you can see more Plan B's because you know what their endgame is rather than just trying to focus on one tool.
CT: For EVP Kyle Stetner, the key difference was in demonstrating that both we as brokers but also our cedants had a strong understanding of what their exposures were and how they wanted to manage them.
KS: I think where we have the most success in placements is where we had spent a lot of time working with clients to really help them define what their risk management strategy is, specifically, when we talk about wildfire. How do you identify key aggregations that drive potential for large loss? And how do you go about reducing those in some manner, whether that's through increased price, something with deductibles or just fully exiting portions of a given geography? And so I think it became really important for clients to differentiate themselves by showing that they've got a true handle on what that exposure is, that they've got a way to quantify it, and that they have a strategy around managing that, whether that's keeping it on the books and charging more or saying, Hey, this is something that's a little outside of our risk appetite going forward.
So a lot of time, I think it's been spent over the last 24 to 36 months on working through some of those development of some of those strategies, and then over the last six to 12 months, making sure that that's communicated in very clear manner to their counterparties. I think reinsurers seem to want to focus on the nuts and bolts, right? It wasn't it wasn't a good enough answer to say, hey, we've got some strategy to handle wildfire. It's ‘no, what are you doing specifically to handle it in areas A, B and C?'
CT: For the UK and Ireland's Dan Robinson, it was the broker's ability to drive a more tailored approach to cedants' reinsurance purchases that proved key this year, particularly in the face of some fairly strong efforts for a more homogenised approach from some quarters.
DR: Well, I think at the moment, there's a big push from the market to create market standards on wordings on hours clauses, on structures, on can you buy above a certain return period. And I think it's incumbent on us as brokers to really add value to our clients by be spoking every purchase of reinsurance to what our clients need, don't be bound by the market saying, ‘you cannot have prepaid reinstatements, you cannot buy access at a certain level,' because we're in a market and it's a trading place. And you can always offset a give on something with a take on something else. So I think where we added most value at one seven, was to not let the market dictate what our clients could buy.
We dictated what they bought and made sure we were negotiating the right outcome for our clients, so that they came away happy, and the market thinking well, we kind of achieved what we wanted, but through other means and everybody, nobody was overly happy, and nobody was particularly unhappy. So that normally means that we're just about to hit the right note. So be spoking your purchasing to what your clients needs, I think is probably the number one thing that we should all be doing in this market.
We have to provide cold hard evidence—sometimes you have to sit down and walk through a waterfall chart showing how exposures changed and what the knock-on impact is on the pricing. And look, you we are giving you this rate on this, and what we're doing is making you receive money for the fact you're offering prepaid reinstatements or wider hours clauses. So, you can't rely on ‘Oh, go on, mate, please do me a favour.' In this market, you really have to provide analytical evidence of what you're doing and come up with really good analytical broking arguments to achieve the outcomes. The soft market days of ‘well, we know you need to like the insurance, so you'll do it' have gone. So, you have to think a little bit more intellectually on how your arguments are going to be presented to the market.
CT: Dirk Spenner pointed to the advantage Gallagher Re possessed in terms of having experienced brokers on the team who had endured a hard market before and were conditioned to know how best to be that premier advisor our clients rely upon in such challenging circumstances.
DS: I think what has been crucially important, at recent renewals, is that we need to guide our clients through a challenging renewal that many players have not witnessed previously, whether this is on the supply side or on the demand side, and providing an objective and realistic picture of the marketplace is something that was immensely important and rewarding for clients, and then structured solutions that are realistic, sustainable, and where we as brokers were able to provide insights that these are marketable and supportive.
CT: I asked how we had approached the challenge of helping less experienced talent in the firm get up to speed with how to broke in a hard market.
DS: We started really early last year, when the initial signs arrived that this would be an extraordinary marketplace, that was challenging. We structurally went to our less experienced colleagues and to actually sort of help them along and remind the experienced colleagues of what they had seen 20 years ago, and more and, and provide a really realistic outset about the do's and don'ts which we felt made a huge difference.
Clearly when Hurricane Ian struck the marketplace it served to lead to another level of hardening and we continue to make sure we provide everyone with sort of best advice and help and guidance because that really made me that made a big difference in the marketplace and it was certainly was a renewal market that was unprecedented compared to previous ones.
CT: Dan Robinson also noted how tough it was on some of the younger members of staff in those early bruising months of the hard market.
DR: It was very tough, I'd say. Somebody turning around and saying, ‘There's no way I'm going to do that, come back and see me when the price has gone up,' it feels very rude to somebody that's never experienced that before. And I think a lot of it is in the getting them prepared and understanding that is what might happen. Because these wily, old underwriters that have been around for 30 years, they kind of know how to play the game. And you just have to play the game with them.
And there's always a bit of a dance we have to go through and educating our younger members in the team as to how to do that dance is very important. And we've talked about this in the past - there's no substitute for just learning on the job and being in the office and seeing how the senior brokers act, listening to how we talk on the telephone or how we interact face to face. You'd struggle to pick that up via Teams conference, because it's a very different media. So I'd say in any renewal season, if you can get into the office, and watch how your senior colleagues, senior brokers are acting and trading business that's always going to benefit you.
CT: That's all we've got time for in this episode. My thanks to all of our contributors and to you, our listeners, for your support. Do make sure you subscribe to ensure you don't miss any future episodes, and if you fancy a trip down memory lane to see how the rest of 2023's major renewal seasons worked out, you can find the rest of our episodes on all major podcast platforms.
Until next time, thanks for listening!
