Host Mark Cobley speaks with Gallagher Re's experts about some of the challenges clients experienced at this renewal, and the difference that our brokers made in finding solutions and building consensus across the market.
This podcast features insights from Asia and Japan regional leaders David Bangs and Robin Swindell, Head of Global Clients Will Thompson, and Head of Marine and Energy Nick Croxford.
Mark Cobley: Hello and welcome to the fourth episode of Gallagher Re's 2024 post-renewals podcasts, where we're continuing to take an in-depth look at the April 1st reinsurance renewal period; which is traditionally important for the Japanese market in particular.
In our last episode, we heard that this renewal largely marked a continuation of the trends in place since January, with reinsurers happy to provide capacity, and moderate increases in risk-adjusted pricing, if that.
Nevertheless, there were certainly parts of the market where there was work to be done to bring cedants and reinsurers into alignment. This was true of two lines of business in particular; casualty, and property per risk, where the ability to demonstrate underwriting discipline was a key differentiator between insurers.
Here's Will Thompson, Gallagher Re's Head of Global Clients, with more:
Will Thompson: There's huge appetite for purely domestic Japanese casualty. But certainly for the larger non life companies, they have exposures emanating from the US, and their reinsurers have a slightly more cautious appetite. I think what's important to note, though, is that whilst the Japanese clients have historically offered some fairly sizable limits to some of their core clients, in respect of that US exposure, there's an awful lot of work being undertaken on the primary side to reduce those limits. So I think what we saw this year was sort of the need to really talk to reinsurers about the primary underwriting actions that are being taken, and how the way in which some of those exposures that emanate from the States are written are quite different from how sort of that exposure is written in the domestic US marketplace. So some of the trends and thematics around US casualty are directly applicable to Japan, but there are some nuances that need to be sort of understood and taken into account.
That was a particularly big theme across, not just casualty, but the property per risk as well. And I would say the casualty and the property per risk, were the two lines of business that required perhaps the closest attention at renewal. I don't want to call them difficult lines of business, because, you know, there was ample capacity available. But in both of those areas, there were some very interesting, very meaningful primary underwriting actions being taken by our client base that needed to be very carefully explained and positioned with reinsurers so that the appropriate credit could be given for those underwriting actions.
MC: And with reinsurers keen to deploy capacity in property cat, while insurers looked to get other risks covered, there was obvious scope for compromise. Here's Robin Swindell, Executive Officer for Gallagher Re in Japan:
Robin Swindell: I think one thing that's also worth noting is that as reinsurers' appetite to write more property catastrophe business became clear, it also became apparent that there wasn't an increase in demand from the Japanese market. As a result, a number of the reinsurers have sought to leverage their capacity in other lines of business; the more difficult lines, like US casualty, and some of the specialist lines, against property cat — to ensure that they can indeed deploy their capacity. The reinsurers that have benefited from that most are the large diversified reinsurers, those who offer all lines of business, those of whom who have a large footprint in Japan. Where reinsurers have lost ground, that is typically the monoline property or property cat reinsurers, who've been in some cases cut back or not allowed to grow, at the expense of these diversified reinsurers.
For David Bangs, Gallagher Re's Head of APAC UK, this was one area where brokers added a lot of value at this renewal — helping to manage the relationships across classes of business, and across the market as a whole.
David Bangs: It was very clear that those reinsurers that supported per risk, liability, certain other lines of business, when the renewal was concluded and written lines were in, I think those who were able to support on a cross-class basis were relatively looked after on the cat side. So as a result, placements were completed across the board, I'd say relatively early, in terms of getting the capacity in. The main challenge, however, came that how do you allocate fairly the signings, based on that understanding that you would look after those who'd supported cross-class lines of business when ultimately, far more reinsurers have come to play in that space than might have been expected at the beginning. So ultimately, the challenge came down to relationship management. And it led to some pretty tough decisions having to be made around signings on the cat, with essentially those unable or unwilling to offer required breadth of support, probably suffering the most. This was probably seen most acutely among the fronted funds, whose sort of monoline appetite, and also quite highly specific EL targets, made the most susceptible to significant signing down. And so there were some, shall we say, quite disgruntled reinsurers, funds, come first of April. So that was the challenge.
And I think that sort of flowed into where the brokers added a significant amount of support, which was, obviously helping cedants manage those relationships, and take a fully holistic view of those relationships. And, in fact, often across different broker allocations. So most of the Japanese business tends to be — certainly for the major cedants — tends to be placed on a consortium basis. But different treaties may be allocated to different brokers, depending on the client. So I'd say as a result of that, the brokers needed to work particularly collaboratively on those grown-up consortium arrangements. And, certainly, no room or patience for any broker games', as it were. And, you know, in order to manage reinsurers' desire to add value across multiple lines of business, I'd say that was a fundamental role that was challenging for the cedants to do on a direct basis.
MC: Will Thompson picks up the thread, and looks at the signing process in particular:
WT: At the end of the renewal process, one of the challenges that we faced was actually a very, very difficult signing process. Because there had been a very noticeable increase in capacity in certain areas, it made for a much more challenging process to sign the core cat programs. I think there'll be some reinsurers who perhaps aren't particularly pleased with the signed lines that they received. And I think there was also a dynamic at play whereby reinsurers who had been able to support across some of the slightly harder classes of business, like the property per risk, like the casualty, they were rewarded with better signings. So that signing process was a little more complex than sort of 12 months ago.
MC: In the marine market, as we covered in our previous episode, the Baltimore bridge disaster has left many insurers and reinsurers watching keenly to see how loss claims develop. At Gallagher Re, our marine team is analyzing historical precedents, such as the grounding and partial sinking of the cruise ship Costa Concordia in 2012, which caused about USD1.5 billion dollars of insurance losses. This work will give our clients added insight into the scale of likely losses from the Baltimore disaster. Here's Nick Croxford, Head of Marine and Energy at Gallagher Re:
Nick Croxford: We've got some sort of historical precedent around Baltimore, in that in 2012 we had the Costa Concordia, and arguably, the aviation market, post Boeing and post Russia/Ukraine. So they are two instances where you've had very, very sizeable RDS type losses. And so we are already looking at what and how the market reacted to those losses, to give our clients our view on what we think will happen going forward, based on historical precedent rather than conjecture.
Obviously, the Baltimore loss is likely, if it plays out as we expect, to fall heavily into the hands of the retro market, which has had a good run for a few years. But yeah, the retro market is definitely harder, and that is simply a factor of supply and demand. You know, we are fortunate in that we are a very significant player in that space. And, you know, a lot of our markets are also our clients. But again, you know, we can use the historical analysis from Costa and from the aviation market, to see how the differential in pricing between retro and first-tier might play out, and how that will influence both those writing and buying retro as we go into 2025.
MC: Heading back to Japan, Gallagher Re has also been working to bring our expertise in Insurance Linked Securities, or cat bonds, to this key insurance market. Here's Robin Swindell with more:
RS: So in Japan, we've been able to take advantage of the expertise of our Insurance Linked Securities team. They have been riding a wave of success in placing new and renewed cat bonds, and that's an area that we're very happy to be expanding in Japan. More generally this year has allowed us to demonstrate the quality of our analytics and our analysis, and this helps our clients both prepare for the renewal but also negotiate and manage the renewal process in the most efficient way.
MC: And Will Thompson added that while ILS is not yet a huge feature of the Japanese risk transfer market, it is definitely something cedants want to be ready for.
WT: For Gallagher Re, it was a very positive story at first of April, as we placed our first Japanese cat bond, for Japanese earthquake. But when we look at the overall sort of Japanese property cat landscape, I would say that most of the buyers are still using ILS in a modest way, it doesn't form a huge part of their overall risk transfer. I think most of the clients want to make sure they have a good understanding of how the product works. They want to sort of make sure they understand how to execute these transactions. They want to have relationships with some of the funds, they want to be able to sort of scale those vehicles up, if ever they need in the future. But currently, they still represent a relatively modest part of the overall risk transfer of Japanese property cat.
MC: Elsewhere, Gallagher Re was also delighted to take on two new contracts in the renewable energy market this April, since the energy transition is a key area of focus for the firm. Here's Nick Croxford again:
NC: I guess a demonstration of the importance, the increasing importance of renewable energy is that we picked up two new contracts at the first of April, which are both renewable energy focused, as our clients are looking to secure capacity to enable them to support their own clients. They were done pretty swiftly, with top quality security. I think our knowledge and our expertise that we've got in the background helping us help the reinsurers understand the exposure was critical in making that a success.
I mean, renewable energy… you know, rather like the world is a fragile place at the moment, if you look at an area where just about every country of the world is investing, it's in renewable energy. And we're not just talking about offshore wind, we're talking about solar, we're talking about carbon credits, the whole space. So it's an area of excitement, and a lot of that will fall into the specialty market. It's an area we've identified, because we've made specific hires in that space over the last 12 months. And these aren't brokers these are, you know, these are coming in from an engineering background, specifically from Siemens Gamesa, to help us understand more fully. The levels of investment in this space are mind blowing, and therefore, for the specialty sector, there is a clear path of organic growth. But a lot of it is an area that there is a lack of experience and a lack of knowledge. And we are, we're committed to helping our clients and our markets understand that, we're going to hold their hand through it, with the investments we've made around, you know, real, intellectual property. And, you know, we are getting these, these individuals that we've hired out in front of both markets and clients to educate them in a partnership approach, which I think is the Gallagher way.
MC: That's all we've got time for in this episode. We'll be back in the summer, when we'll bring you our take on the all-important 7.1 renewals. Until then, don't forget to subscribe, as we're now available on Spotify, Apple Podcasts and all other good podcast platforms. Thanks for listening!
