In the first episode of Gallagher Re’s post-renewals podcast series for 2024, we uncover what happened and why at the January renewals.
Welcome to Gallagher Re's first post-renewals podcast of 2024, where we go beyond the headlines of rate movements, T&C tussles, and retention levels and investigate some of the reasons why 1.1 played out in the manner it did.
In this first episode, host Mark Cobley investigates the January renewals, which marked both a return to more stable and predictable conditions compared to last year, and a market where client differentiation was not only feasible, but essential.
This podcast features insights from Gallagher Re's Tom Wakefield, James Vickers, Dirk Spenner and Ditte Deschars.
Mark Cobley: Hello and welcome to this, the first of Gallagher Re’s 2024 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 1.1 played out the way it did.
What lessons can be learned? What might we infer for future renewals, and what was the difference that the reinsurance broker made for their clients?
Let’s begin with a reminder of the key trends at 1.1.24. This year, Gallagher Re’s First View report to clients was titled ‘What a Difference a Year Makes’, and with good reason.
Compared to this time last year, 1.1.24 marked a welcome return to more stability and predictability. This made for a somewhat smoother renewal experience for all parties.
I began by asking James Vickers, Chairman of Gallagher Re International, how he would characterize this latest round of renewals.
James Vickers: Well, I think it was a return to what a number of people have described as an orderly market. What does that actually mean, an orderly market? And I think what it means for the buyers was a return to reinsurers being able to quote, comfortably in advance, for enough time to have reasonable discussions about quotes and discuss issues; for firm orders to be given in line with reinsurers’ normal expectation, and for cover to be completed reasonably on time.
And at the same time, you know, reinsurers were anxious to maintain their positions. Obviously, 2023 is looking like it's going to be a very good underwriting year for reinsurers. A lot of them have been commenting in the market that this is some of the best underwriting conditions they've seen. So a lot of them are looking for growth. Not at any price, but looking for growth, and particularly for preferred clients and for structures that they like. And that certainly made life a lot easier.
MC: Of course, orderly does not mean free of challenges. Tom Wakefield, Global CEO of Gallagher Re, made the point that in a year where nominal insured losses from natural catastrophe events again topped 100 billion US dollars, there is still some concern whether cedants will be able to access the property cat capacity that they need in 2024. This is particularly a concern given the expectation that rates within the underlying market are beginning to ease.
Tom Wakefield: So I'd say overall, the mood of clients was welcoming more stability from the market, more predictability about what was going to be offered. But also aligned with that is continued concern of the underlying performance of insurers. In particular, the severe convective storm events that happened during the year, the fact that there are still over $100 billion of insured losses. And the fact that those that are operating on the basis of admitted filings have struggled to get allowance for rate increases that actually allow them to protect earnings at a level that reinsurers are no longer prepared to reinsure to. So while the stability and consistency is back and being welcomed, I think there are some underlying concerns about the portfolio and the lack—and the amount that reinsurance actually helps deal with some of those underlying issues, particularly around climate change.
In conjunction with that, the mood of reinsurers was more pragmatic, it was more bespoke. It was more focused on client differentiation. Reinsurers were more willing to negotiate on price than they were on coverage or deductible level. And our view would be if you take the client concerns that still exist, and where the reinsurance market is at today, we’d like to bridge that gap over the course of the next 12 months and ask reinsurers to focus on more coverage and more deductible-based solutions.
MC: This return to a market where client differentiation is not only feasible, but essential, was something also highlighted by Ditte Deschars, Regional Director and Head of Gallagher Re Carrier Management.
Ditte Deschars: The discussions were back on the table, and it was client focused. So last year was very dogmatic, and this year, I think we were discussing individual clients’ portfolios and their contracts. So that was very good. And if you're thinking, you know, reinsurers in most instances thought that 2023 had been a quite satisfactory renewal, probably even more than they initially had hoped for last year, actually. And I would say, whilst investor pressure for sustainable returns kept the underwriting discipline in place this year, it was very clear that markets were back to ‘risk on’ as we say. But clients on the other side, they were much more aware of, and understanding of, the pressures that the reinsurers had been under. And therefore, I think the clients took a more open approach to where the pressures were likely to come from. So typically, lower attaching cat layers for example.
So whilst this didn’t mean that we needed to see significant structural changes this year, because actually, a lot had already been done in 2023; it did mean that all parties came to the table with a more open mind and willingness to reach, say sensible results. And this was a stark contrast to the 23 renewal.
MC: One important area in which an open and flexible mindset helped negotiations this year was on pricing. Prices did rise at 1.1.24, but only by mid-to-high single digits on most loss-free portfolios. Not an easy pill for clients to swallow, but nonetheless, better than where reinsurers initially quoted. Here’s James Vickers again.
JV: There was a little bit of disappointment, I think during the quoting process. Reinsurers realized that last year's renewal, 1.1.23, they did burn some bridges and stretch client relationships quite extensively, and were looking to make that up. And certainly at the first of the pre-renewal conferences in Monte Carlo, there were lots of soothing noises being made by reinsurers to clients about continuity and reasonable pricing. But some of the initial quotes when they first came out, were disappointing to some buyers and they felt, ‘hang on, that's not quite the message I was hearing at Monte Carlo.’ Why are reinsurers still looking for some – not as much as 2023, but some – significant risk adjusted rate increases?
However, when faced with the reality of the firm orders, that collapsed quite quickly, and buyers were able to get their programs by and large done in time, and fairly quickly.
MC: Ditte Deschars suggested that one lesson we might take away from 1.1.24 is that the quoting process itself might benefit from more of this open mindset.
DD: It feels like the quotation process has become a bit robotic, and without any clear, client focus objective. So almost there seems to be a lack of energy, or ultimate purpose. So you know, why do you want to be one of the few quoting markets? And what is it that you want to achieve by providing that quote? So to give you an example, in many instances, quotes this year, were actually coming in quite higher than what we originally expected. And the range between the quotes were not very significant. So it felt like many markets just pitched at a round risk-adjusted increase level, irrespective of the starting point of these accounts.
But in the end, most markets were very comfortable to follow the firm order terms, which were, in instances, quite significantly below the quotes. So the question is, why not utilize the quotation process as a more proactive means to show what it is you want to achieve with that particular client? And I think this will be interesting to see now how this evolves during 2024, especially as the over-placements were quite significant at 1.1, and many markets didn’t manage to get the shares they originally hoped for. So I'm wondering if we're going to see a little bit more of a commerciality and competitive edge in the quoting process than we did at 1.1.
MC: Ultimately, at this renewal, driving big rate increases was simply not the priority it had been for many reinsurers last year. Here’s James Vickers again.
JV: Reinsurers I think had entered this renewal season, their primary anxiety was to maintain the key structure levels. Yes, they would have liked bigger rate increases, of course they would. But the reality is, they were more than happy to accept even very modest rate increases, or in some cases, no rate increase at all, because they think that the business by and large, is now adequately priced. And as I said, we’ll look and see what reinsurers, how their 2023 underwriting years’ results come through, but they will have a very profitable year, and a number of them will comfortably exceed their cost of capital, for the first time in many years.
So that gives them comfort, so long as they stay roughly at the same sort of pricing levels, 2024 should be a similarly good year.
MC: This renewal also saw a return to a more rational balancing of supply and demand, where the smaller number of significant rate increases that we did see were driven for the most part by significant losses. This was illustrated quite dramatically in Europe, where Turkey suffered a magnitude 7.8 earthquake in February. Significant flood losses in Italy also shaped the most recent renewal. Here’s Dirk Spenner, managing director of the Europe, Middle East and Africa region at Gallagher Re.
Dirk Spenner: Where significant losses occurred, i.e. in Turkey and Italy, we've seen very significant adjustments, and in particular, in Turkey, a very dramatic change in terms and conditions, to a degree that was pretty unprecedented in Europe. So yes, I agree with you, we've seen in most territories where there wasn't any particular loss occurrence, mid to high single digit adjustments. For larger programs, and then perceived premier placements, the sort of lesser amount on the scale; and smaller and regional programs more at the upper end of that. But the stand-out territory in terms of market disruption, and market correction was clearly Turkey, where rates doubled and tripled. And that was certainly very significant.
MC: Another contrast to last year’s negotiations came in the area of retentions. One outcome of 1.1.23 was that cedants found they had to shoulder greater losses before their reinsurance programs kicked in, set the stage for a comparatively loss-free underwriting year for reinsurers, and better results. I asked Tom Wakefield, did we see retention levels shift again in a significant way this year?
TW: No, no. And our view would be they didn't need to. Retentions moved significantly in 2023. Clearly, when we talk about risk adjusted rate, that factors in the fact that there may well be exposure increases as a result of inflation that goes into the program, and that would pay more premium albeit that the rate on exposure may be the same. And we are starting to see some clients wanting to retain more risk, particularly where they've got… they’re unencumbered from a capital perspective. So, at one end of the spectrum there are clients that are struggling with the increases of retention that they've been asked to assume, from a capital perspective, particularly if they can't generate the admitted rate filings that are required to increase the pool of premium that sits within the retention. But on the other end of the spectrum, where there’s a lot of clients with excess capital, and more and more retained earnings and an underlying buoyant insurance market, they are starting to not buy bottom layers where they don't see value or reduce quota share cessions accordingly.
MC: For the most part, with their balance sheets buoyant, reinsurers were willing and able to deploy capacity – it was just a question of where they did so. In Europe, for example, there was a noticeable preference for what reinsurers regarded as more attractive business, with signs of competition coming back into the market in some instances. Here’s Dirk Spenner.
DS: One thing to note was, whilst it was it was addressed in the media by some of the reinsurers, particularly leading reinsurers, that there would be additional cat demand in Europe which would impact pricing, that really didn’t materialize. Although there wasn’t any new ‘group of 2023’ generation of reinsurers, the existing players had plenty of additional capacity to give. And one of the things that we certainly noticed was that reinsurers withdrew from certain areas of catastrophe reinsurance 12 months ago. And clearly, given the results in 2023, they re-entered the market with growing appetite.
But the difference to maybe previous years, was that they didn’t supply that additional appetite across multiple markets and across multiple players. They were focusing on a few particular large ones, and so channeled the additional appetite onto some (what they decided to be) prime placements and prime carriers and prime cedants. And that clearly created a run on those programs more than in previous years. And given the attractiveness, then, of those placements, this created a more-than-expected over-placement for middle and upper layers than you would have necessarily thought at the very early stages of the renewal.
MC: These signs of over-placement may bode well for insurers going into 2024, as Tom Wakefield observed.
TW: If I had to sort of summarize where we feel the market’s got to, we think it’s pivoting. So we’re going from reinsurers choosing not to deliver cat capacity in 2023 – there was never a capital issue around delivering cat capacity, it was a choice based on appetite and concern around the underlying volatility of the portfolio. Now, supply is easily keeping up with demand. And we’re seeing more and more appetite and over placement on the specialty and cat programs. And so it feels like we’re at the top of the hard market, as we sit here today.
We feel there’s still a strike price, and so you can end up with slightly, the price being too low and not being able to finish the placement, just as easily as you can end up with 150-160% on the slip. However, you’re right, it indicates that there is more supply in the market, and that in turn indicates that that might be the start of a change. I think the big question for reinsurers is how much margin is left in the business before they start to reduce their limit again. I would suggest enough for there to be some more favorable terms for clients. What we would like to do is work with those reinsurers on how they can deploy some of that capacity in areas that our clients want it. So at the moment, they're offering it more in the tail and higher up on occurrence programs. And we’d like to see it helping them with some of their earnings challenges. So that’s a big project for us during the year. But generally speaking, you know, it does suggest there’s more supply than demand. And we're also watching to see, and talking to clients about, what increased demand they may have, which would fill that supply. And there will be more clients come into the market during the year to buy more limit.
MC: And as 2024 develops, it is worth remembering where we have come from. Ditte Deschars provides some historical perspective on an eventful two years for the reinsurance industry.
DD: What an impressive industry that we are working in! You know, we, we’ve gone from where we've had 15 years of relative predictability, more or less, to a very unpredictable, and almost chaos, in 2023, where capacity wasn’t necessarily missing, but it was very constrained by appetite. And clients faced, I would say unexpected levels of pressure on price, on coverage, attachment points, not really seen this level of pressure in a generation. To then, nine months later, we find ourselves ahead of the 24 renewal, you know, we’re getting into this renewal in a much more calm way, predictable. I would say that the 24 renewal was well planned for, and where underwriting discussions, and client focus was fully back on the table.
MC: That’s all we've got time for in this first episode, but be sure to return for part two, where we discuss some of the pockets that clients found particularly challenging at 1.1.24, and the role of the reinsurance broker in helping to tackle those issues and produce the most optimal outcomes for our clients.
