Host Mark Cobley speaks with five of Gallagher Re's expert brokers about this key moment in the annual reinsurance renewal cycle, when the lion's share of Japanese business is done.
This podcast features insights from Asia and Japan regional leaders David Bangs and Robin Swindell, head of global clients Will Thompson, and Marine and Energy experts Nick Croxford and Jason Cudlipp.
Mark Cobley: Hello and welcome to the third 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 the April 1st reinsurance renewal played out the way it did.
In this episode, we turn our focus East, since 4.1 is the key renewal date for Japanese insurers. But it is also an important renewal period for the global marine and energy markets, and that's particularly true this year, since on March 26th, a container ship ploughed into the Francis Scott Key Bridge in Baltimore and caused its collapse.
This disaster has the potential to be one of the costliest ever to hit the marine insurance markets — though as we'll hear, it's not expected to be unmanageable. The industry's job is to cover losses, and it has absorbed similar-size marine claims before.
But let's begin by zooming back out to the broader story of the 4.1 renewal, which was summed up by the title of Gallagher Re's First View report: 'Heading Out of the Woods'.
The April renewal took place against a backdrop of strong results and profitable underwriting conditions for reinsurers. That made them keen to write business, so capacity was plentiful in many markets, and insurers enjoyed incremental improvements in risk-adjusted pricing for their reinsurance covers.
In many ways, this was a continuation of trends in place since the global renewal in January, which was characterized by a return to more stability and predictability, compared to the sharp price increases seen at January 2023.
We'll begin with some thoughts from David Bangs, Gallagher Re's Head of Asia-Pacific UK.
David Bangs: I'd say that in terms of the overall mood for clients, cedants… I'd say cedants (with brokers) went into the renewal obviously far calmer than they did this time last year, based on the knowledge that probably the worst had passed in terms of price movements. As we discussed last year, we were coming into the 1.4.2023 renewal off the back of what we consider to be a 70% compound increase in rates over the last three years or so, partly following losses, but also a function of the market.
So there was certainly an expectation that any increases this year would be far less significant. And I'd say generally, brokers and cedants' initial views were to expect modest further increases, perhaps taking into account where we are in the payback cycle. But also looking at what happened at 1.1, being a little bit more relaxed around the market pressures being less than they were in 2023.
How that translated to the reinsurers' side of things was actually dovetailed probably quite nicely, insomuch that reinsurers were also, I'd say, measured from a pricing expectation perspective. And in fact, messaging in the early stages, tended towards satisfaction with pricing, terms and conditions from last year. And I would say, almost a token of muted expectations to sort of, again, modest increases, risk-adjusted increases, but some reinsurers were even talking about risk adjusted flat at quite an early stage. So I think the reality of that, is that somewhat bearish position for reinsurers probably betrayed some concerns around meeting budget, based on what they'd just been through at the first of January, where the renewal concluded with some pretty brutal signings, as cedants looked to optimize cross-class support, and really focus on core partners. And so that played on reinsurers' mind quite a bit and led to that fairly positive message to cedants. That led reinsurers to understand the need to offer more supportive positions to cedants, both in terms of writing across the board, multiple classes, but also to offer sensible pricing from the outset. And in fact, we did see that from the start, in terms of a much more consensus around the quoting process, certainly, in terms of that first round of quotes.
MC: This was particularly evident in the Japanese property catastrophe market, where risk-adjusted rate changes came in the range -5% to plus 1% on loss-free portfolios. I asked Will Thompson, head of global clients at Gallagher Re, about the supply and demand dynamics.
Will Thompson: For the property cat reinsurers, they were definitely sort of "risk on" so yes, there was an increase in supply. No doubt about that. Going back 12 months ago, you could describe the market as somewhat dislocated. You had a very wide variance in quotes, you had different reinsurers pushing for different terms and conditions. It was really quite tough to form consensus. This year, when we look at the quoting process, with only a few outliers, the vast majority of reinsurers were quoting within a very narrow range. So there was a lot more consensus in the market.
There was no increase in demand overall from the Japanese market. If there were one or two clients that were buying sort of modest amounts of additional capacity, and when I say modest, really no more than sort of a 5% increase on what they were previously buying. And there were some clients that were buying less. So overall, the Japan cat market was broadly flat in terms of demand, very different from some other geographies. You know, the US is certainly seeing increases in demand and some clients buying material amounts of additional limit, either at their regular renewal or outside of their regular renewal cycle. But for Japan, it was a story of sort of flat demand and increased supply.
MC: Things were not quite so straightforward in the casualty market, where reinsurers were more cautious, and some pulled back capacity. In no small part, this was due to developments outside Japan, particularly in the US, where Japanese insurers cover many Japanese businesses' casualty risks in that country. Here's Robin Swindell, executive officer for Gallagher Re in Japan.
Robin Swindell: Casualty is quite different from the property side. The Japanese market is dominated on the casualty side by three or four large companies, all of whom have significant exposure to the US casualty market. The US casualty market, as I'm sure we've discussed in previous podcasts, has been a particular issue and source of concern to reinsurers for some time now. So the Japanese catastrophe — sorry, the Japanese casualty renewal at 1st of April has actually been dominated by discussion about US casualty trends.
It's certainly the case that as we came out of COVID, we did see a spike in US casualty cases getting settled and that had impact on development patterns and loss payments. But beyond that, there is a broader concern about the very litigious nature of the US market, that some States in particular have become very unfriendly towards insurance companies, and we're seeing a very significant inflation well above monetary inflation and well above normal social inflation levels, of court case awards — particularly for single individuals.
Japanese manufacturers, over the last 30 or 40 years, have moved quite a lot of their production through to the US. Their historic insurance partners, the Japanese domestic companies, have moved with them and service a lot of their insurance needs locally in the US, elsewhere in North America, and in fact, all the way around the world.
These relationships between the Japanese insurers and the large Japanese manufacturers are some of the closest and most important relationships for the Japanese insurers across the last 40 years. And there is a tension between our clients wishing to service the needs of these very important clients, and also recognize reinsurers' and their own concerns about the underwriting of US casualty exposures.
MC: Turning to the global marine market, some of the same supply and demand dynamics were on display — at least until the Baltimore incident. Here's Nick Croxford, head of Marine and Energy at Gallagher Re:
Nick Croxford: First of April renewal is probably the second largest in the marine & energy space. But actually, there are renewals going all the way from first of January; so first of February, 1 of March, and the first of April is, is a relatively busy period for us in the marine energy space.
Undoubtedly, there is capacity available for first tier reinsurance and a hunger amongst the reinsurance market to write business, which we witnessed at the first of January, that continued through to the first of April. You know, this is the second largest renewal date, as we've just said, but equally it is probably the last. So after this, there's very little opportunity for people to make up any lost income for 2024. So, you know, depending on how reinsurers got on at the first of January, they're adjusting, potentially adjusting their appetite as we as we run through Q1.
And I think, broadly, it was the same dynamic as we saw at the first of January, which is capacity. I mean, it's a market; supply and demand dictates every market and we're no different. There's a surfeit of capacity. And whereas pricing in '23 was on an upward curve, I would say it was flatlining to actually beginning to show the odd sign of coming off a little bit. And then, of course, we had a significant incident in the US, at the back end of March. I woke up on the Tuesday morning, see a bridge collapsing into the sea, and that's definitely changed the environment, if not, for the first of April, certainly for the outlook going forward.
MC: Various media and industry estimates have put the total potential insurance losses for the disaster as high as USD3 billion, but the final amount will take years to emerge. The vessel that collided with the bridge, the Dali, is insured by the Britannia P&I insurance club, in London, which in turn is part of a mutual system of shipowners' insurers that should spread any losses out right across the market. Jason Cudlipp, a senior director in client relationship management for Gallagher Re's specialty marine P&I business, points out that the industry has absorbed similar losses before, and they have proved eminently manageable.
Jason Cudlipp: The shipowner in this case can avail themselves of some limit of liability under the Limitation Act, which they've already filed for, which I believe can limit their liability to less than USD50 million in this case, and the Limitation Act is there, historically, to encourage people to bring commerce and shipping to North America under the protections of the Act. So if that limitation sticks, then that is a relatively manageable claim from the P&I perspective, and won't even hit the reinsurance of the International group.
The Britannia is part of the International Group of P&I clubs, who buy a collective reinsurance program where each club has an individual retention of USD10 million where they can make their own reinsurance arrangements themselves, then claims up to USD100 million are pooled between the 12 clubs in varying proportions that add up to 100%. Then essentially above USD100 million, it goes into the global reinsurance program, which is predominantly led in the London market and in Lloyd's for the first layer, maybe the first two layers, and then above levels of around about USD2 billion, we're into the international treaty market and some of the property market as well.
So the risk is very well spread, but, for average-size large claims — say, claims over USD100 million — it's very much concentrated in the London market. You know, it's part of a mutual system. The clubs collectively are there to pay their members' claims. The Dali, the owner of Dali, will be a member of the Britannia, and they're there to pay each other's claims. The reinsurance program goes up to claims level of USD3.1 billion. It's very difficult to perceive how we get there at the moment, but we've got to wait until the legal arguments have settled and that's going to take years and years. The biggest claims in the P&I reinsurance sector, historically, have been oil pollution and removal of wreck, and at this stage it looks like there's no potential pollution at all. And it seems that the vessel is relatively stable, albeit you know wedged underneath the bridge at the moment.
So we've been in this situation in the past with Costa Concordia in 2012, which ended up costing reinsurers around about USD1.4 billion, and in the same year we had another wreck removal down in New Zealand, a vessel called the Rena, which was about USD450 million. So the industry's experienced a loss year of approaching USD2 billion and handled that relatively well.
You know, prices did go up. There was some stress in the market. Treaty reinsurers — i.e. those reinsurers of the insurers of the International group — paid their share, maybe 40% or 50% of the claim, and the industry survived and continued to flourish. So we've been here before, albeit we haven't had a situation where it's probably as visible as this, and the damage is quite so extensive, as far as a bridge collapse is concerned.
MC: Nevertheless, it is likely to have some impact on insurance pricing. Keeping a close eye on how this develops will be a key focus for Gallagher Re's marine team for the rest of 2024.
JC: I think one thing we are kind of sensing at the moment is that the market, the marine liability market, was slightly softening during Q1; those renewals, that the P&I renewal at 20 February was a little bit softer than 1.1, and we were expecting that to continue down through this year as capacity increases and rating adequacy becomes more sustainable.
I think that that's over now, certainly from the attitude of the market, but I think we've just got to keep a little bit of a level head over the next few weeks and few months, to wait and see how this actually pans out. So yeah, I think it's a pricing situation rather than a collapse of the market and people going bust and so on — it's very manageable.
I mean the International group themselves pay a substantial amount of reinsurance premium to the market. Over a cycle, whether that's five or ten years, the market has made money. Whether the market think they've made enough money or not is a different question, but they continue to write it on the whole.
So yeah, I think we we'll go through a cycle of tension over the next few weeks and months, once some figures become clear as to what the total value for marine insurers and reinsurers is, we'll have some clarity about how to manage that going forward.
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 challenges clients faced at 4.1 — as well as the ramifications of the bridge disaster — and the role of the reinsurance broker in helping to tackle those issues and secure the best outcomes for our clients.
