Host Mark Cobley speaks with four of Gallagher Re's experts about some of the challenges clients experienced at this renewal, and the difference our brokers made in finding solutions and building consensus across the market.
This podcast features insights from our leaders in several key regional markets around the world: Brian Flasinski, CEO for North America; Heather Bone; CEO for Australia and New Zealand; Edson Wiggers, CEO of Latin America and the Caribbean, and Chris Hayday, head of Specialty Lines in the UK.
Mark Cobley: Hello and welcome to the sixth episode in Gallagher Re's renewals podcast series for 2024, where we're taking an in-depth look at the July reinsurance renewal and how it played out in several key markets across the globe.
In the last episode, we heard how the market experienced a largely orderly and balanced renewal at mid-year, with reinsurers buoyed by good results, not significantly affected by catastrophe losses, and keen to deploy capacity. Buyers were able to secure modest improvements in pricing, but reinsurers held the line on retentions.
But this alignment of supply and demand does not happen by itself, and there are sometimes particular challenges to overcome in finding common ground. Heather Bone, Gallagher Re's CEO for Australia and New Zealand, gives some of her experiences at 7.1.
Heather Bone: One of the key challenges for this renewal actually for clients was around trying to balance their desire for long term partnership and for honoring loyalty, with the fact that we saw at least a couple of reinsurers being quite out of step with the market. And you know, I think clients had had to endure these fairly substantial price increases, and there's been a lot of talk of long-term partnership as they went up and as things have stabilized, they're not always seeing those partnerships sort of coming back the other way.
But they don't want to remove partners lightly; but it then becomes very difficult because on the one hand you want to maintain that long term partnership, especially if there's been loss activity, but it's very hard to justify when a couple of players are very out of step with the rest of the market and you want to get the best outcome for your customer, and you know that ultimately that those prices are going to get passed on.
And so, we did find that some tough decisions had to be made. And you know, some of those players did end up getting written down on a number of programs. But like I say, it's not something that clients take lightly. It's something that actually they grapple with quite a lot because they want to have those long-term partnerships.
MC: One of the broker's key roles is to represent our clients's; particular circumstances and give reinsurers comfort with their ways of doing things. With most reinsurers operating on a global basis, there is an important regional dimension to this, as Heather explains.
HB: We place a lot of casualty programs at 1.7, and where I think in property there's quite a lot of consistency in the understanding of the risks - I mean, people might model the perils slightly differently, but there's a lot more consensus around what a property damage likelihood looks like - whereas in casualty, the range of products seems to be a lot broader, the nuances within those products, the jurisdictions, the regulation, there are lot more differences. I think I can hand on heart say our clients are all very, very good at what they do. You know, they're specialized, in the main, and they understand their risk extremely well.
They underwrite very, very effectively and they choose to cover what they believe they can effectively underwrite. And our job then is to make sure that that's really well understood in the global stage, and why does some, you know, other-side-of-the-world, little specialized insurer do something a particular way, when it might not be something that say, the Lloyd's market, or the Bermuda markets, are as used to seeing.
And so our job is to really understand our clients, make sure that we know why they are doing what they're doing, the approaches, the effectiveness, and then that we're able to really explain to the underwriters in the kind of language that they understand, and can use to make decisions, so that we get those favorable outcomes, so that we generate interested markets for those clients, and they're not penalized just because their world isn't as well understood in London as it say is down here.
MC: As in previous renewals, though, US casualty was one particular source of concern. Brian Flasinski, Gallagher Re's CEO for North America, explains how we helped insurers with some of the issues.
Brian Flasinski: One of the key challenges that we wanted to focus on is the adverse loss development in the liability lines for some of our North America clients. Overall, with less confidence by reinsurers in the liability market, cedants were required to articulate their underwriting and pricing strategy to navigate the underlying issues facing the market, which created headwinds for placements.
One of the things that I think is, you know, really important for Gallagher Re and how we help our clients, we develop a bespoke advocacy view of risk for each of our clients. This is a robust quantitative and qualitative advocacy approach based on the cedant's actual portfolio, which allows us to improve outcomes for our clients.
While this is relevant to all lines of business, our advocacy view of risk, this has been extremely helpful and helping our clients articulate those underwriting strategy changes and the resulting impact on the portfolios to their reinsurance partners.
Other lines of business where this is relevant is within the property cat space, creating a customized view of risk for cat perils with our clients, based on their historical data. In addition, on the property per risk market, understanding the impact of inflation and stress testing against that to understand the impacts on risk programs. And so overall, we've been able to use our advocacy view of risk to help our clients across the spectrum.
MC: It was also true that the market environment at 7.1 was much more conducive to this kind of advocacy than it was this time last year, and brokers had more time and space to tailor client's demands to reinsurer's supply. Over to Chris Hayday, head of specialty lines at Gallagher Re UK, to explain more.
Chris Hayday: Certainly, we had two significant renewals with the same attachment date, in 2023 and 2024. They both restructured in 2023. And through their own underwriting, whether it was remedial work or a change in their appetite for particular lines of business or occupancies, we saw that we were able to continue to mold their program more into something that was a better fit in 2024, to what perhaps was more market-driven in 2023.
So, it wasn't necessarily that the pricing was driving that, or reinsurance capacity was driving it. We just had more success in tailoring something that was a better fit in 2024, than some of the kind of barriers we met in 2023. Some of that was also based on goodwill. If our client is looking to make changes to their underlying portfolio, we will look to scale portfolios and provide views to reinsurers on what it'll look like at inception, after one quarter, two quarters, three quarters etc.
Often, and certainly the case in 2023, the market view was, "well, we're going to base our pricing and base our capacity, more on what the portfolio looks like today. But we'll be open to discuss it in 12 months' time." So, the market kept their word on that. Once we were able to provide an evidence-based view of "We said at the time that our cedant, or client said they were going to do this. They've done it. These are the outputs and the outcomes," we now need the reinsurers to provide a service, and design or help entertain a program that's a better fit than perhaps what was there 12 months prior.
MC: The specialty markets can also provide covers for some of the world's trickier perils, such as riots or political violence. With fears over such problems rarely out of the news, Gallagher Re has been pressing hard for our clients to get the protections they need. Here's Chris again.
CH: There's some sensitive perils in our world, which, you know, we do our utmost to address. Reinsurers have an eye at the moment on the geopolitical environment. Obviously, this year is a big election year. We've seen the outcome in the UK. We've seen I think, a few people breathing a sigh of relief, at some change that isn't afoot in France, that potentially could have led to some heightened tensions there. We obviously have the US elections coming up later this year.
But I think as a consequence of that, political violence and strikes, riots, civil commotion, remain classes of business - or sorry, not classes, they remain perils where certainly property reinsurers are quite cautious with their approach. You know, we've resisted full-on exclusions for these perils, especially as they are all-risk covers that our clients are offering their customers. And I'm sure if you had a brick through your window at home, and that caused damage, you expect your insurance to pay for it. And now our clients are seeking the same from their reinsurers, albeit at a different scale.
So, where we've seen some things like reinstatements - sorry, things like event definitions maybe have been tightened, and some reinsurers have pushed for only one reinstatement in the event of a loss arising from SRCC perils. So, we're trying to find middle ground on a number of these things, we've tried to avoid or move away from named perils slips, certainly on risk business.
MC: Another area of concern for clients in recent renewals has been the reduced interest from reinsurers in covering the lower layers of programs - that is, the smaller or more common losses. Instead, there has been a preference for larger, more remote risks. Edson Wiggers, Gallagher Re's CEO for Latin America and the Caribbean, said cedants in his part of the world have begun to consider a solution already implemented elsewhere - structuring reinsurance deals over several years, to help deal with this.
Edson Wiggers: One of the key triggers of this phenomenon was the hardening of the reinsurance market, especially over the past two years, when, particularly in some territories like the US, reinsurers pressured clients to significantly increase their retentions in cat excess of loss programs. This trend naturally generated an important impact on client's retained cat portfolios, with increased retained exposures creating increased retained earnings volatility, and in some cases requiring increases in statutory reserves.
In response to this challenge, and in order to assist our clients in navigating through this new market environment, Gallagher Re teams across the globe started to deliver solutions to stabilize clients' earnings, and efficiently build reserves via multi-year structured agreements. Although in some parts of the world these solutions were already incorporated within clients' reinsurance programs, over the last several years we have seen more and more clients in the region implementing these solutions across Latin America, as they represent an alternative to the traditional structures.
It is worth mentioning that these customized solutions are not applicable for lower layers only but can also provide an alternative for top layers when substantial capacity is necessary to support clients' growth. One of the reasons the number of programs implemented in Latin America is smaller compared to other parts of the world, is because outside of peak capacity regions such as the Caribbean and Chile, the reaction of reinsurers in this part of the world was less dramatic in terms of risk-adjusted increases, and capacity contraction, when compared to other regions.
MC: And of course, alongside the southern US, the Caribbean region is also where the North Atlantic hurricane season has the potential to cause damage, as we have unfortunately already seen in recent weeks. Hurricane Beryl, which made landfall in Grenada on July 1 and also hit Mexico and Texas, is preliminarily estimated to be at least a billion-US-dollar loss event across the region. Gallagher Re has been keeping a close eye on developments.
EW: After the 1.7s, we observed Hurricane Beryl opening the hurricane season and affecting Grenada just about two weeks ago. Our team was closely monitoring the event, sending daily updates from the Gallagher Re first event response to our clients and keeping them closely informed about potential loss impacts on their portfolio.
Mark, I want to take advantage of this conversation to emphasize that since the very first days of this event, our team was relentlessly working over the weekend to make sure our clients had cash-call losses collected immediately, because we understand the relevance and the importance that this prompt response had to communities highly affected by this severe event. And after only three working days following the event that hit Grenada and other islands, a significant amount of cash calls were already transferred to our clients' accounts. Our team have been proving being prepared and delivering super-fast responses to our clients in this type of event.
Luckily, at the end of the day Beryl landed in Mexico as a Cat-1, which was naturally a huge relief not only to the Mexican insurance companies, but especially and most importantly to the population in that territory.
MC: And the last word goes to Chris Hayday, who emphasized that the way the hurricane season develops will be keenly watched by the industry for the rest of this year.
CH: We've all read, and we've publicized that this year is forecast to be a high frequency hurricane year of activity. That's quite an eye opener, that one that's gone through, looking at Beryl's track, looking at the intensity of that. I mean, I'm hopeful that that's not going to be repeated week in, week out, for the next three or four months - but it's something we need to keep an eye on. You know, I think if we use this renewal season, these mid-year renewals at June and July, as a benchmark for 1.1, the advice we are going to be able to give our clients will be consistent with what we've seen this year. If there is heightened loss activity or heightened hurricane activity that results in losses, then we need to be cautious on how we're addressing things. So, one hopes that we don't suffer as a consequence of the high frequency of hurricanes. But we have to keep a watching eye, as we're only halfway through the year.
MC: And on that note, we draw our series of 2024 post-renewals podcasts to an end. We will look forward to the 1.1.25 renewal in January, when Gallagher Re will once again kick off the New Year with our market-leading First View report - giving you the comprehensive low-down on rate movements, and how the renewal ran.
Many thanks to all of our podcast contributors this year and to you, our listeners, for your support. Do make sure you subscribe to make sure you don't miss any future episodes, but for now, until next time - thanks for listening.
