In the sixth episode of Gallagher Re’s post-renewals podcast series, we return to Florida and ask our panel of experts whether we’ve reached peak rate for Florida property reinsurance, the difference between tactical and strategic reinsurers and how the reinsurance broker made the difference in getting programs home.
This podcast features EVPs Adam Schwebach, Joshua Knapp, Martin Verrills and Bryan Friendshuh.
Charlie Thomas: Hello, and welcome to the latest episode in Gallagher Re’s post renewals podcast series, 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.
In our last episode, we learned that this year’s Floridian renewals had been a more orderly affair than previous years, driven by a combination of increased capacity being made available, and earlier than normal marketing efforts helping to get placements home.
In this feature-length episode, we consider the dynamic of cedant/reinsurer relationships in the region – how important strategic and tactical relationships are to getting a program over the line, whether we’ve now reached peak pricing for Floridian cat risk, whether there is any read-across for future renewals from this somewhat idiosyncratic marketplace and – as always with these podcasts – how the reinsurance broker made the difference.
First, to the role of strategic reinsurance partner, versus the more tactical, opportunistic players out there. After five successive annual renewal cycles where rates were on the up, there were certainly some markets that saw the latest rate environment as a tactical opportunity, as Gallagher Re EVP Martin Verrills explains:
Martin Verrills: I think that several markets have seen this as a market opportunity, …the pricing probably wouldn't get much better than it did. So this year was the year if you're going to bet on the Florida market this year was the year to do it with roughly 30 points increase on last year. So that's, I think that's the main driver.
CT: But there were also those who see Florida as a long-term, strategic play, as EVP Adam Schwebach illustrates:
Adam Schwebach: Yeah, maybe they had their tee times already set for the last week in May… but, there was definitely the ability for reinsurers - and speaking with a couple in particular, they were basically done by the middle of May. They had gone to brokers and cedants in late March, early April with offers to say, hey, we can do this. Let us know if you're interested. And you know, in most instances, those were taken up. And those reinsurers, I really think that they were able to get what they wanted. But it's also going to be something in that clients will remember, that those certain markets will come off as being extremely helpful in what was, you know, a very tough renewal.
… these were much longer term relationships and with big cedant/reinsurer relationships on both sides, right. So there it wasn't like they were introducing themselves and saying, here's an offer. They weren't they knew each other's organizations very well to the point where they could make these offers early. But like I said, I think that those reinsurers will come out of this with stronger relationships than those that were maybe hoping for shortfalls at the end of the year. … I think buyers are they've grown weary of those types of operations, right? If a reinsurer’s, you know, entire MO is just to wait for, you know, shortfalls at the end of the year. They're going to find themselves out of out of client relationships very soon.
CT: That’s not to say all short-term, tactical partners are bad. On the contrary, they can be useful. But it’s imperative that all sides understand where they stand in that sort of relationship, so expectations can be set early. Here’s Adam again:
AS: No, that's exactly right. And maybe, you know, and in many instances, the clients and the reinsurers will have a very open conversation around the fact that their relationship is very opportunistic. And at some point, it's going to end and I think everybody's okay with that. So long as you know, the reinsurers getting their price for the time being and the client still needs their capacity, then it's a relationship that's worth keeping. But you know, that was another key part that we were able to accomplish for, you know, one client in particular, this year was taking one of those 2022, opportunistic relationships and being able to shrink it a little bit. And it wasn't something that was necessarily going to be something that we went into the year saying ‘we’re going to do this’ ,but it was something that over the course of the renewal we found that we were going to be able to do. And so, taking away an opportunistic relationship and replacing it with several, what will be, long-term relationships for that client, they're going to be in a much better position. And if it saves him a couple bucks along the way, it's an even better trade.
CT: For Gallagher Re EVP Joshua Knapp, the occasional movement on panels as environments wax and wane is part and parcel of the renewals cycle.
Joshua Knapp: I mean, there's always there's always turnover on panels, there's always changing appetite. And that's something that as a broker, we have to help manage that for our clients and manage the expectations around the interest in the programme. Another good example of it is the Ren Re acquisition of Validus. There's uncertainty now that creates uncertainty around our clients that have Validus on their programme that may not have RenRe on their programme, for example, there's, you know, questions being raised around you know, what is RenRe going to do with that support on my programme, are they going to be there next year? Um, so those are those are constant items that are on the top of our list to continue to have dialogue with our clients so that they're prepared. There's, there's strategies around that as well. Never over leveraging your placement with any one market is very important as well. Having a well diversified panel or creating as much diversification as possible is a very key component to having a healthy programme for the long term.
CT: A key question that was asked in the run-up to 6.1 was whether, after five years of successive rate increases and a significantly harder market at 1.1, we have finally reached sufficient rate adequacy, whether pricing has now peaked for Floridian property. And the consensus from the team here is, yes. Here’s Bryan Friendshuh, EVP at Gallagher Re.
Bryan Friendshuh: Yeah, I think so. I mean, I just looked through at what happened at 6.1, right. And I think there was a kind of a fear early on, and we talked about the fear of the hard market and how hard it was going to get done, and that ultimately led to the pricing increases that were achieved. But I do think you saw clearing at, you know, as you got into the middle of May, the market cleared rather quickly. As you know, I think there was, as I mentioned, there was a lot of capacity, reinsurers that were looking to write more on nationwide carriers, there were some sign backs and cutbacks and capacity on those accounts that push more capacity than Okay, I can't get it there, I need to go focus on the Florida domestic companies deploy the capacity I have left there. And also you had markets like Berkshire, DE Shaw, and others coming in and also playing ball which piques the interest of others, right? Like, if Warren Buffett's going to do it, I can do it too. And I think that led to the pricing that where we're at, which is I think you'd be looking at rate online indexes, it's probably the highest it's been in as far back as those indexes have been tracked. So I think even in the current cycle that we're in, in terms of increased frequency and severity of cat events that we've had the last few years, I think there's a general feeling that the pricing levels are adequate to even sustain if that cycle continues? … I would call that a good healthy place to be in terms of the reinsurance market and pricing.
CT: Adam Schwebach agreed, saying that based on his conversations this year, it would be tough to forecast the Florida market hardening much more.
AS: You can always make the case for some sort of a doomsday, you know, large cat event, but I would tell you, given the current pricing, unless you're talking about, you know, a 2004/2005 again, where there's multiple events, and reinsurers are really losing a lot of money… one single hurricane, I don't think has the ability to harden the market anymore than it currently is. The reinsurers are just being paid too well for the risk they're taking. And I think the capacity that we've seen come back into the market, maybe give another year for reforms to kind of kick in, this feels like if we're not at the top of the market cycle, we can see it. And so, you know, going into 2024 I think that companies are going to finally be able to take a closer look at their reinsurance panels and truly make some decisions around okay, you know, this is somebody who I had traded with for the past two or three years, it's been very opportunistic. We're both okay with that. But as we head into a different part of the market. Are there better trading relationships that I should be considering to replace them with?
CT: And here’s Joshua Knapp with his take:
JK: Yeah, I would say that we are at the peak - rate adequacy is there, the capacity is there. And if we go through a situation now where - let's just throw out a scenario - where we do not have a hurricane that impacts the state of Florida and those programmes go clean this year, I think you will see the pressure on rate rollback some. And we would look to, you know, get back to more of a normal, low single digit rate increase, something that keeps up with inflation. That type of a strategy. It'll also attract additional capital to the reinsurance market. We haven't really seen it that greatly as of yet. There are some reinsurers that have raised money. Early on, we had Ariel Re raise funds Vantage was successful in raising some funds. Most recently, we had Everest Re raise over a billion and a half of capital 90% of that is going to be allocated towards reinsurance given the rate environment. And then we also see markets that have historically only played in in the cat space when the rates are viewed as adequate, like Berkshire Hathaway, very much an opportunistic market, they only choose to play when they view the rates are at the peak. With the prevalence of Berkshire in the Florida market, I think that's a great signal that there is definitely rate adequacy, given the current market conditions.
CT: So what, if any read-across can we take from what happened at 6.1? Here’s EVP Martin Verrills.
MV: Florida is essentially its own marketplace. And it's always different to the others. I think, if we can take a read out of it, the fact that it was so orderly, we would hope that that's got reinsurers into a mindset here. So there's hopefully there's a degree of an orderly renewal for the July 1s as well.
Certainly, with regards to contracts, I think that would be the case, because that was essentially sorted out at the first of January. But I think if reinsurers still think that there's going to be a 40% or 50% increase, aka first of January, I don't think it's going to happen. And I’ve got to think they don't either.
The June and July renewals last year did receive an increase in pricing, whereas the previous January renewals hadn't. And that was I think a lot of the reason for the 1.1s in conjunction with they just had Hurricane Ian. But I think there was a degree of acceptance that last year, the mid-year renewals had an increase and didn't deserve the same sort of treatment. And that allied with what happened with big Bermudian reinsurers making a play and putting down big lines. I think that brought the orders to the market and I hope and think that it's going to be the same July 1.
CT: What about the issue of appetite for property cat though? Surely the fact that so many markets came back into play at 6.1 is indicative of a wider return of capacity here? Here’s Joshua Knapp.
JK: Yeah, so I think Florida is a great bellwether, I mean, it's the peak catastrophic zone in the world. The margins that reinsurers are able to achieve on that business are the most robust in the entire marketplace. So that attracts reinsurance interest, because of that, and the margins that the Florida cat business can throw off, can really drive profitable results if done appropriately and in situations where we have a normal pattern of hurricane activity. So I do think it is a great bellwether for other markets … largely because I think it shows the resiliency of the reinsurance market.
And what I mean by that is we saw a fundamental shift in the 1.1 reinsurance renewals. And it had been a very, very laxed renewal cycle, probably for the last decade or so at 1.1 at a minimum. And what I mean by that is, is there was a lot of, oh, well, it's not peak catastrophic, reinsurance, you know, it might be a bit more benign SCS exposure. Well, the fundamental shift occurred in a lot of different aspects, one, retentions for a lot of the 1.1 renewals had lagged in terms of where they attached relative to mid year renewals, for example, and those needed to be corrected. And that occurred at 1.1, we saw significant increases in retentions, primarily due to loss activity. And there were several reinsurers, and a majority of the market that was definitely pushing to not only increase retentions, but also push for capacity shifts up into towers, higher up into programs, to move away from the frequency of loss activity that was deteriorating their own results.
CT: For Adam Schwebach, it’s less about how unique Florida’s risk profile is, and more that there are so many other macro issues at play that the region is perhaps less idiosyncratic than it once was.
AS: Yeah, I mean, I think having seen similar trends at 1.1, honestly, I think that this is a broader market movement that we're seeing, there's obviously catastrophe losses that are impacting the state of Florida, right. You can't discount that. And there's been loss experienced with it. There's been loss experienced elsewhere, as well through the Midwest through Texas, right, through California with wildfires. So I don't think that that Florida renewals are quite on the peninsula, no pun intended, that they typically were. Because there's just so many broader factors right now that are impacting reinsurance pricing.
When you look at inflationary factors, you look at the strong dollar and exchange rates and what that's doing to things. You know, there's just too many factors that are having the overall impact on reinsurance capacity right now, interest rates are obviously having a huge impact on the rates of reinsurers need to charge now. I truly think that that right now is a bigger driving factor. That, you know, we've seen very similar results now from 1.1 through 6.1 And we've had those same kind of broader economic factors in place through those renewals. So I think those are probably having a larger impact. And it's going to be something that until there are major changes in some of those economic factors that I would think will persist until they normalize.
CT: And now it’s my favourite part of the episode where we learn how brokers made the difference at this renewal.
Here’s Adam Schwebach:
AS: So I think it was incumbent on brokers to be able to have the analytics ready to go when those types of deals came up. But also to be able to have the conversation with the client around here's, here's where the market is headed, you know, getting this capacity in the door now is going to be beneficial for you, for any number of reasons. And here's where to think about this deal. And it's not to say that every one of those early offers was necessarily worth taking. But the ability to kind of parse through that with a client in in what is a very different kind of placement cycle, to say, Okay, we're going to have some of these early deals that get done.
For many companies, they don't deal with that way, right? They're used to the standard, send up the submission, get quotes, talk about firm order terms, go to the entire market with the terms and we're going to get everybody to agree to those terms. And we're going to finalize the placement - to get certain markets that were very key contributors coming in early to say, we'll, you know, by the end of these conversations, we could have half the replacement done before we even issue the rest of the information out to get quotes. That took just some additional counsel and some additional information coming from brokers to clients to get them comfortable with that, but at the end of the day, that seems to be one of the ways that, definitely help companies get their programs done in a more beneficial way without the need for short fall placements. And while also making sure to keep some of the longest supporting reinsurers still in tow….
We did spend a lot of time working with our clients in that regard to make sure that they were putting good information forward so that reinsurers didn't have to make any assumptions where we say, you know, every time reinsurers make an assumption, they add a margin. So to you know, to take that out of their hands and to give them information that already included projecting forward inflation factors helped a lot.
But also helping them understand you know, how those inflationary factors have been used over the past year to 18 months to get us to this point, the final piece that came up in certain instances more than others, but there were definitely still plenty of conversations between reinsurers and cedants surrounding their financial strength, and just helping reinsurers understand, you know, here's the kind of the current state of play for this specific carrier. For some that was an easier conversation than others. For some, it's very self apparent, for others that, you know, they may need to just kind of dig in and show some additional information. And they by and large, our experience is very positive in that regard.
CT: Adam also noticed that there were fewer reinsurers pushing to accelerate reinsurance premium payments this year.
AS: It's something that's been a topic of conversation for the last two renewals now … if you're afraid that somebody can't pay all their deposits, then you want to ask for the premiums earlier. But you know, that might actually put them in financial trouble, versus, you know, letting them pay over four quarterly deposits. So, but, you know, I think this was a year where reinsurers, were maybe a little bit more flexible, and how they were able to finalize deals, still looking to push for the premium payments a bit, but not necessarily asking for 100% deposits on June 1, like we saw from some carriers last year.
CT: Bryan Friendshuh echoed Adam’s comments on the importance of getting the submission data and information right.
BF: I've heard from our executive team that multiple reinsurance carriers have indicated that the Gallagher Re submissions are, are probably the best in the industry and the most in depth. And in terms of, you know, another key component to the Florida renewals was, hey, what's the impact of the legislative changes going to be on future losses and, you know, our ability and our analytics approach to quantifying that and trying to help the reinsurer see, hey, this is gonna have a meaningful impact and which will impact your loss costs going forward. You know, I think our ability to do that and demonstrate that was certainly to the benefit of our clients.
CT: And our final word goes to Joshua Knapp:
JK: At Gallagher, I think one of the things that we do between our offices for the mid year renewal is that we do communicate on a regular basis and strategize across each and every one of our clients. Heading into this renewal, we were fully prepared for a capacity crunch across the board on programs. And so what we did to better prepare our clients was is we looked at the full spectrum of options. So we looked at traditional reinsurance Of course, that's always going to be the bread and butter of the vast majority of placements. We also did some ILS transactions early on with our capital markets teams that helped leverage a lot of the placements because what we do with the ILS market is, by bringing that that capacity to these programmes. It reduces the need that we have on the traditional space. And by reducing that traditional market capacity, we are able to create leverage in a program and in creating leverage is the best situation that you want to be in as a broker. Because once you are able to attract enough capacity to a program, to have certainty that you're going to be able to complete the placement for your client, you then can start pushing back on terms and conditions. And that's where the value that the broker teams were able to bring to our clients this year.
In addition to that, we also looked at parametric solutions, we were under the suspicion that we were still going to have challenges with low down capacity and programs in particular. And we looked at a wide variety of parametric solutions, everything from ILWs, to county weighted to loss index program products. But also modelled loss covers where the client can utilise the footprint loss from the vendor model and use that to settle a reinsurance transaction. So by having each of the teams prepared to work with their clients, to be able to evaluate the full spectrum of solutions, we were better positioned to have certainty and provide comfort to our clients that we would have solutions to complete their placements.
CT: That’s all we’ve got time for, thank you so much for listening. If you enjoyed this podcast, please hit subscribe to ensure you don’t miss future episodes, and please share with your colleagues and friends. See you next time!
