Welcome to the second episode of Gallagher Re's post-renewals podcast in 2024. In this episode, host Mark Cobley explores some of the pockets clients found particularly challenging at this renewal, and the difference brokers made in finding solutions for their clients.
This podcast features insights from Gallagher Re's Tom Wakefield, James Vickers, Dirk Spenner and Ditte Deschars.
Mark Cobley: Hello and welcome to the second episode of our 1.1.24 post-renewals podcast, where we go beyond the headlines of rate movements, T&C tussles and retention levels and investigate the impact of the reinsurance broker at this renewal.
In our last episode, we determined that this round of renewals marked a return to a more orderly market, following the tough negotiations and significant risk-adjusted rate increases in 2023.
Nevertheless, stability does not mean a lack of challenges. In this episode, we’re going to take a deeper look at some of those areas where clients encountered difficulties at 1.1.24, and how Gallagher Re’s broking teams worked creatively to overcome them.
As we observed last time, while there was no shortage of reinsurance capacity at this renewal, it was a question of where reinsurers wanted to deploy it. Some clients found it difficult to get cover for lower attachment points, for instance, as reinsurers continue to be wary of the impact of attritional losses.
Here’s Tom Wakefield, Global CEO of Gallagher Re, to explain more.
Tom Wakefield: Well, I think, lower layers that were not bought in 2023, you couldn't go and buy them for 2024. So from that point of view, there was still no particular appetite. More oversupply is at the higher end of programs, so the reinsurer appetite for tail risk is higher than it is in the lower return periods. And that’s where we saw some oversubscription and where we saw some rate reduction, particularly on US cat, the top end of the programs.
The complexity that exists is still that there is not enough cover in the earnings level even in the tail. So even at the sort of capital end of the protection for smaller or mid-sized losses, reinsurers are sitting in excess of mid-sized losses. And what you've seen with the way that reinsurers are deploying their aggregate is that isn't changing. And it's our job to make sure that it does change, and that reinsurers are offering flexible capital-based solutions for clients. We don't expect reinsurers to write themselves back into a loss position that they've written themselves out of over the last 12 to 24 months – but some more innovative solutions around how to help clients deal with multiple earnings type losses would be helpful, and help clients.
MC: James Vickers, Chairman of Gallagher Re International, echoed the theme. He said Gallagher Re’s broking teams had put forward innovative solutions to help overcome the mismatch.
James Vickers: The one area where buyers struggled most, there were a couple of areas where they were disappointed because they do want cover. And the first is low-level protections, so-called volatility protections. This was a key point at the 2023 renewal where reinsurers were absolutely determined to move up, and get buyers to retain more. They succeeded in doing that, by and large, and the results of 2023 – 2023 has been, you know, an over $100 billion of natural catastrophe losses, yet none of them particularly big. And by moving up retentions, reinsurers have ensured that the primary companies have retained a lot of these losses, they haven’t been very badly hit by them, hence, they've got a profitable underwriting year. So very attractive from a reinsurance point of view, but problematic for primary companies, and a lot of primary companies still want, and in some cases need, that low level protection. And that is becoming very, very difficult. So aggregate covers, covers that are incepting at lower than 1-in-10. Very, very difficult to place. And this is where broker innovation came in quite a lot.
And so-called structured solutions, taking into account the time value of money, and maybe some quota-share pro rata solutions for those people who were more stretched around capital, came in. To be fair to reinsurers, some of them reacted to that demand from clients for help, and a few more reinsurers had more interest in capacity in providing structured solutions in that area. But, you know, I would say the flip to that is that some of the bigger companies, they just absorbed an increase in retention and carried on. So that was an area that was difficult for those, as I said, mostly medium-size-to-smaller companies, companies who may have some capital strain, or companies who are finding it difficult to change their front-end underwriting as quickly as their reinsurance cost is going up. Those are not exclusively, but tend to be more personal-lines orientated companies.
MC: These structured solutions have been quite common in the more mature markets for a number of years but have been underutilized elsewhere. I asked Dirk Spenner, managing director for Europe, the Middle East and Africa at Gallagher Re, whether his broking teams were able to take advantage of Gallagher’s global reach to deliver better outcomes.
Dirk Spenner: Yes, absolutely, it's about finding, finding alternatives. That marketplace was just not in existence, compared to structures that were historically in place. And it wasn't in existence for any money in parts, because reinsurers just simply didn’t want to provide capacity in frequency areas. So it’s about thinking quite creatively and finding alternative solutions. And, and those we did. I felt that, at Gallagher Re, we were at the forefront of innovation here, and created, in many instances, an alternative that will be a multi-year structural solution, which was able to give cedants an attachment point that they were ideally seeking, but also provided risk-sharing in a way where reinsurers were able to connect with cedants and underwrite it at that level.
And those structures are around for many, many years, but they were increasingly sought after, at 1.1.23 already, but certainly was a big step up at 1.1.24.
Until two/three years ago, the demand to place those covers in Europe was simply not there, because you would be able to fill cedants’ needs through traditional protections. And they’re clearly preferential because they give straight-in, immediate risk transfer, without having to embed them in a multi-year structure, where their risk-transfer is then logically more limited. But with the withdrawal of reinsurers from the traditional product, the alternative was to retain or, or to find innovative solutions, and we were helping many clients to identify those. And in many instances, people exercised them and transacted. In other instances, people felt that they could retain the additional risk and didn't place those covers.
Those covers were historically much more present, particularly in the APAC market, so Europe clearly benefited from early product development somewhere else, and from there, thinking how to implement them into client strategy.
MC: Going into the renewal, the casualty market was another source of some concern. In the US, there was some expectation that negotiations could be challenging, given the longstanding problem of social inflation and rise in nuclear verdicts, when juries award ever-larger amounts of compensation. But in the end, it was smoother than expected, according to James Vickers.
JV: Pre-renewal, there was huge amount of talk about casualty, particularly US casualty or international casualty with any US touchpoint. There was a lot of talk around that and that's a complex area, because there are many differences of opinion on the rating adequacy and the current primary policy form in US casualty, versus the problem of nuclear verdicts and inflation.
So a number of reinsurers were coming into the market looking to achieve additional improvements. Equally, there were a number of buyers coming into the market, actually very confident in their original underwriting and all the remedial action they've taken, that they've done for the last three or four years. And in some cases, if they were not able to achieve the terms they wanted, they were happy to retain a bit more. So what was advertised in advance, perhaps not correctly, as a big problem area turned out to be less of a problem area than anticipated. But it is fair to say that the additional issue with casualty is that the 2014-to-2019 underwriting years are developing very badly. So individual reinsurers’ own positions on these back years does have an influence on what they are looking for at the front end. So that was probably the only other area of significant contention.
MC: The work that cedants, in collaboration with their brokers, do to differentiate themselves, really shone through during the casualty reinsurance renewal discussions, according to Tom Wakefield.
TW: In terms of how far apart the clients and the reinsurers were in those negotiations; I think US casualty had a lot of press, particularly US third-party liability, or general third-party liability, it had a lot of press in the lead up to 1.1. In reality, what shone through was that the clients had done an awful lot of work on their underlying portfolios, whether that was increasing deductibles, shortening limits, increasing premiums. And US casualty been predominantly quota share, meant that reinsurers have the benefit of that, and a realization that reinvestment rates, having increased, have had a benefit to the reinsurers. So what looked at one point like a requirement from reinsurers for a structural change to that market, ended up with a few points of ceding commission, if at all.
And in conjunction with that, because the appetite of reinsurers for clients’ specialty and cat lines of business had increased, clients that were buying multiple programs, were able to leverage that position to avoid reductions in, or significant reductions in, casualty quota-share commissions. That’s particularly relevant in the US. Internationally, it’s more of an excess of loss market for casualty, and even with changes to limits and deductibles and premiums, more exposure has pushed into those excess of loss layers, so they tended to pay more money, but I think clients were well prepared for that. So I would say reinsurers will probably look back and think they didn't get what they were looking for on the casualty renewals. But ultimately, I still think that that's overall fair in conjunction with the overall client relationship.
MC: Another area where brokers’ deep understanding of individual clients came to the fore this year was in the property risk market. Here, reinsurers were continuing to negotiate hard. Ditte Deschars, Regional Director and Head of Gallagher Re Carrier Management, picks up the thread.
Ditte Deschars: The risk market, you know, that was one of the more distressed areas, because the risk market has suffered so many years of quite challenging results. And if you talk to the big risk writers, many of them have not made any profit for the last decade. So, but the interesting piece here is that I think, or I know, because I speak to the reinsurers, is that they don't necessarily want to pull out of this marketplace, they want to be in the risk space, it's just that they want to find a level whereby they stand a chance of making a profit. So it was, you know, we had a lot of discussion as about understanding the underlying portfolios and changes that are happening in the underlying portfolios. And how can we restrict coverage to make the balance between the insurers and reinsurers a bit more even.
But despite this, prices clearly went up, and especially for loss hit risk programs, but also for loss free risk programs, because the market has suffered such bad results in recent years. But despite all this, there was no shortage of capacity, you know, the core risk XL writers are still there. And we did see new capacity coming in to write risk XLs because of course, prices are starting to improve quite radically. So that will also be interesting to see how that develops, because I think property writers want to be in the risk space as they want to be in the cat space.
MC: The 1.1 renewal took place against a backdrop of escalating conflict in the Middle East, while Russia continues its war in Ukraine. I asked James Vickers whether these global conflicts had had much impact upon renewals in the specialty markets.
JV: I think the issue is, it's all around the war on land, and the event definitions. Previously, a lot of the marine and terrorism and war covers were all placed packaged together, and they were split out separately, last year. And so there was, particularly with the Gaza/Israel conflict, a big attention paid to war on land as regards event definitions, and what we are actually talking about on an excess-of-loss basis. Having said that, you know, for a lot of buyers, there’s an interest in obtaining quota-share reinsurance, where they don’t have these sort of event definition challenges. But otherwise, yes, of course, the conflicts are producing some tensions around aviation war, and marine war, but those markets are reacting in perfectly normal rational ways, as you'd expect. And, again, a bit like some of the mainstream property classes, once the leaders’ terms and conditions had been agreed, placement was pretty straightforward.
MC: War was also a hot topic in the cyber market, where Gallagher Re’s brokers have been negotiating hard on exclusions and event definitions. Here’s Tom Wakefield again.
TW: I think the cyber market continues to be interesting. Cyber war was a hot topic and is a hot topic around exclusionary language and trying to build a long-term, sustainable Cyber market, but one that doesn't start to exclude all the different types of losses that you could end up getting. It's a real conundrum how you build that and make sure that the coverage is as inclusive as possible but doesn't have this huge systemic aggregating exposure that means that insurers and reinsurers alike are unable to offer their capacity. Also, as the market is maturing, it's shifting from more of a proportional market into a more of an occurrence or excess of loss market, including bonds. Obviously, we were very proud to be involved in the largest bond that's been issued on 144a basis, which was the Beazley one. So, from that perspective, I think, I think that's interesting. There's nuances in political violence and terror where, you know, we were successful in moving some of the event definitions for clients to help them with broader coverage around aggregation of what is considered to be an event on strikes, riots, civil commotion and war.
MC: As we look back on the 2024 renewals overall, what is clear is the importance of communicating with clients early, setting ambitious, but realistic, targets that you can deliver, and always being ready to suggest alternative, innovative solutions. Ditte Deschars explains how Gallagher Re’s brokers added value for our clients.
DD: There is clearly a continued rigor around underwriting discipline, right. And we knew this back in Monte Carlo, and at Gallagher Re we were very clear in our communication with our clients, that reinsurers were likely not going to accept margin erosion, right, and on any broader general scale. Which is in fact, exactly what happened. So looking across all regions, I think prices went up slightly, probably even at the higher end, as I said before, so higher single-digit rather than lower single-digit, in most European territories.
And following 2023, when client expectations were clearly not met, we felt this year that it was very important as a broker to provide ambitious but realistic targets, right. So that the clients could have well-informed discussions internally when setting their budgets. So at Gallagher Re, typically, we do not oversell and under deliver. We prefer to advise realistically, ambitiously, realistically, and come up with valuable alternative routes, but always deliver. So, you know, that is one thing that I think is very important for brokers, you know, we want to be a reliable partner that brings value to our client, and with a strong focus on, of course, executional excellence.
MC: I’m giving the final word to Gallagher Re’s CEO, Tom Wakefield.
I’d just like to thank our team really, it's been a great renewal season from the point of view of being able to help with some new opportunities, not having too many phone calls with impending disasters, some very, very good client management across the board. Some really good support from reinsurers and from clients alike. Some great early numbers coming through around growth, and what we've been able to do, and we continue to build on that and build on the franchise that is Gallagher Re. So without everyone working on each individual client and building that trusted relationship and building that bespoke view of risk and taking that to market and doing that over and over and over again, and extracting more and more value for the client, and ultimately, then for us, we wouldn't be in the position we're in. So I'm very grateful.
MC: That's all we've got time for in this episode. We'll be back after the 1.4 renewals to see how some of these trends play out as we progress through the first quarter, so make sure to hit subscribe on wherever you get your podcasts. Thanks for joining us, and see you next time.
