Host Mark Cobley investigates how 1.1.25 played out for both insurers and reinsurers, in a renewal that marked a significant change in market conditions from previous years.
This podcast features insights from Gallagher Re's James Vickers, Nick Croxford, Ditte Deschars and Chirag Shah.
Mark Cobley: Hello and welcome to the Gallagher Re “On Record” podcast, where we take an in-depth look at the reinsurance market renewal cycle at the key dates of January, April and July. In this first episode, we’ll give a general overview of market conditions at 1.1.25, and how that’s changed from previous years.
In our regular “First View” report published earlier this month; our global CEO Tom Wakefield characterized 1.1.25 as a renewal when “differentiation was rewarded”. Insurers really benefited from the hard work they’ve put in to make themselves stand out as prudent underwriters. For the most part, reinsurers came to market flush with capital and keen to put it to good use, so reinsurance supply generally exceeded demand. In many cases, modest price reductions were secured by clients who could show that their exposures were backed up with solid data, and well-evidenced views of risk.
Many people might say that was not before time. This renewal has come off the back of two years when insurers have been asked to pay significantly higher risk-adjusted rates, at the same time as shouldering more of the burden of natural catastrophes.
James Vickers, chairman of Gallagher Re International, explained how reinsurers’ much improved position over the past couple of years was key to understanding this renewal.
James Vickers: Reinsurers approached this renewal off the back of some exceptional results for 2023, and some only marginally less exceptional results for 2024 – they’ve all completely exceeded their ROE targets. The Big Four Europeans are miles up on their solvency targets. So, the reinsurers have done extremely well in the last couple of years.
If you compare that back to 2023 when, yes, there was less capital available, but there was a real reluctance at that time, as reinsurers were worried about the pricing adequacy and whether they really wanted to accept the risk. The last two years have taught them, given them confidence that the restructuring that's gone on in many of the programs, particularly around attachment points on cat XLs, and the pricing improvements they’ve achieved really is delivering them a decent profit, and they want more of it.
And interestingly, it's come mostly from the incumbents. Those are the people who have had not only the underwriting uplift, but also the investment uplift. Yes, interest rates went up a couple of years ago, but it takes time for that to flow through. And if you look at an average non-life reinsurer or primary company, their investment profile is normally about three or four years. So as the old investments, they have come off, they're reinvested at a higher rate, and the new premium they're writing is coming in to be invested at a higher rate. So, you put all of that together, you've got a very strong market with strong performance, not much impact from any new capital. There was some, a little bit – about a billion dollars, but not much. Then, of course, the ILS markets have had some very strong returns, and we’ve seen 2024 has been a record year for cat-bond issuance as well. So, against that background, reinsurers were all looking to grow.
MC: From the insurers’ point of view – that is, the cedants – this healthy appetite from reinsurers set the stage for a calmer and more orderly process, which put them in the driving seat, according to Ditte Deschars, Gallagher Re’s EMEA chair and Global Head of Reinsurance Carrier Management.
Ditte Deschars: I would say that the ‘25 renewal was a more deliberate, a more well planned and executed-within-plan renewal, so cedants were generally back in the driving seat. Many had spent time to differentiate themselves from peers, and this took form in the transparency of their portfolios, quantification of impact of underwriting changes, providing detailed information of claims evolution, or on value of risk, around various perils or subsections within their book, etc. So, this really resonated with the reinsurers. And as reinsurers were keen on deploying their capacity and they were looking for the best places to do so, you could see that this was well received.
So, if we're looking at the cat placements, for example, I think we saw a slight acceleration of softening of the market during November and leading into December. I don't think that it was necessarily further margin reductions, but a general acceptance of the risk-adjusted reductions that were on the table and capacity, therefore comfortably coming on board.
If I'm looking more at, you know, the ‘25 renewal, I would say that we could see as the renewal went along, that the reinsurers’ appetite became more and more clear as the weeks went on and flexibility became more and more evident.
And as this happened, we could see that loss-impacted placements were actually gaining a bit more confidence, and therefore they were pushing the risk-adjusted boundaries, just a little bit more. So we could clearly see that there was a bit of a shift in the market, as November and December happened.
MC: This more orderly process in the run-up to renewal was also on show in the specialty reinsurance market, which spans several business lines from marine and energy to cyber insurance. Here’s Nick Croxford, Gallagher Re’s Head of Marine, Energy and Aviation.
Nick Croxford: The first of January renewal season that we've just had was far more straightforward than those that have been taken place since 2022, when we had the Russia/Ukraine conflict starting. There were far less issues on wordings. I think markets and clients were far better prepared about that. That resulted in far less subjectivities, far more consistency in the coverage that was offered so clients are able to ultimately get their placements in order far earlier than we've seen in the last two years. And I think that was welcomed both by reinsurers and by clients.
So, we were placed comfortably ahead of time. And I think there's a general trend towards that from our cedants, that increasingly they are not wanting to go down to the wire. We're setting deadlines with written lines when they should be received. All our slips, we spent a lot of time in the summer getting slips ready so clients were able to agree slips. A lot of the capacity that we've got is already slips already agreed. So, we're well ahead of where we were this time in ‘23 and this time in ’24.
I think what we saw throughout November was the leaders in the market, of which there are probably five or six, did a pretty good job of keeping consistency of pricing whilst aware of the capacity that was out there behind them. I think they were fairly steadfast in their position.
But I think the growth aspirations of reinsurers sitting behind them more often than not, the following market, which was driven both by new markets and by growth aspirations, really led to the market almost coming off a cliff as we went through December. There was a sort of tsunami of capacity that really came through as placements were finalized, very quickly, and finalized with increasing capacity. I'll be surprised if those growth aspirations of either existing or new reinsurers were fully met, because there just isn't the business to go around, to materialize into the sort of 15% to 20% growth aspirations that a lot of people were hoping for in September, October.
MC: Despite this influx of capacity, buyers might have felt a little anxious about pushing too hard, thanks to a couple of particularly large losses that have hit the aviation and marine markets in recent years, and still remain largely unresolved. But at 1.1.25, these proved less of an obstacle than feared.
NC: So, when we look at 2024, we shouldn't obviously forget the Baltimore bridge incident, which could turn out to be one of the largest marine losses of all time, that had the potential to cause a lot of confusion and disparate approaches throughout the renewal season. But actually, I think the fact that the market came together on a number of USD1.5 billion – it was almost agreed – that made the potential for some difficult conversations effectively go away.
The market was very consistent, and so managed to solve a problem, or not let a problem arise, that could quite easily have happened. So, the way that the reinsurers and clients dealt with Baltimore bridge, I think, was very, clever, very consistent.
There's also an increasing belief that the conflict in Russia, in Ukraine, will be resolved by the incoming president. So, the market seems to be generally slightly more relaxed around that, certainly with regards to RUB coverage or inclusion of RUB exposure. Whether that confidence is misplaced or not, I guess we'll find out over the next few months, but that definitely seems to be less of an issue than it has been in the last two years.
I think that generally has led to a softened approach to the PVT class across the board. Coverage was definitely widened, certainly around SRCC coverage, continuing the trend that we saw in ‘24. There were some differentials; some markets were less willing to give wider coverage, some cedants bought coverage that was not at the widest possible. But generally, the trend has been continued, that it's got better, or the coverage has been wider.
MC: For reinsurance buyers, a strong appetite from sellers despite the losses and problems, is obviously helpful. But it would be a mistake to assume reinsurers are now chasing growth at any price. Here’s James Vickers again.
JV: It is by no means a soft market. It is becoming a differentiated market. And there were examples of some relationships that did break down where reinsurers felt they'd been pushed too hard, and they either reduced their shares, or in one or two cases, in extremis, came off altogether. So, there is a there is still an underlying backbone in the market.
MC: The casualty market, in particular had the potential to be less than straightforward, thanks to longstanding concerns in the US that the courts are awarding ever-larger sums in liability judgements – leading to bigger insurance losses. But according to Chirag Shah, Gallagher Re’s global head of casualty, this caused fewer disagreements between insurers and reinsurers than you might expect.
CS: So, from a global standpoint, the casualty market was generally relatively stable. We saw a market where on the international side, so ex-US, reinsurers continue to show willingness and appetite to grow. Looking for new opportunities to grow, expanding their existing positions and it very quickly became evident that the area of focus and potential concern was really in the US space. And when I say US, I refer to US portfolios but equally US exposures within international portfolios. So, where a carrier may have some global exposure – either US export exposure, or indeed multinational policies where an insured may have exposure in the US as well. And so, from a US standpoint, reinsurers’ concerns… you know the reality is that the concerns that the reinsurers had, and have, is very consistent with the concerns that the carriers have.
So, I would characterize the renewal as reinsurers and carriers all being on the same page about understanding what the issues really are, particularly as I said in the US. And so, it wasn't necessarily a renewal where we had a very combative or, you know, a conflicting position from carriers and reinsurers. I think it was really more about both carriers and reinsurers understanding the dynamics at play, specifically in the US, and most importantly investigating with data, with evidence, the strategies that carriers have put into place, and trying to make sense of what the profitability picture may look like going forward.
MC: In most US casualty lines of business, rate changes and movement on ceding commissions were relatively stable. Nevertheless, there were some areas where loss-hit portfolios, in particular, had substantial rate increases, such as US healthcare.
CS: There are pockets of the casualty market that are still challenging. You know, healthcare is, with medical inflation, medical costs continuing to go up in the US, healthcare is a line of business that remains challenging. And as a result, particularly loss-affected accounts did see, in some cases, material increases in terms of risk-adjusted rate.
I think from a broader casualty picture, what was more relevant this renewal than simply just the outcomes in terms of economics, was around capacity. And I think what we found in this period, this renewal season in particular, was that reinsurers were really focusing on determining who they wanted to back for the long term, who they were going to increase. If a reinsurer was looking to grow, for example, who they were going to put their additional capacity behind. Or indeed, if reinsurers were looking to potentially right-size their portfolios, where they were going to be pulling capacity – but more importantly, retaining capacity to stay relevant in the casualty market.
So, I think the capacity piece was really the major outcome here in terms of carriers being able to, as I said before, tell their story, be able to evidence the strategies that they have with data and true performance information, and then therefore attract capacity to their programs.
MC: Turning now to the property market, this area too enjoyed broadly stable and orderly conditions, with modest rate reductions for many lines. There were also encouraging signs that reinsurers were ready to show more flexibility in some areas of longstanding client concern, according to Ditte Deschars.
DD: I would say that there were less binary stances of ‘yes’ and ‘no’. Reinsurers were generally interested in considering different offers. So as examples, aggregates gained more placement success. Lower layers came home at stable retention levels, and there were less differences in conditions, so generally, just more flexibility and appetite, but without losing underwriting discipline. A little erosion of margin, but not totally losing underwriting discipline.
MC: This flexibility will have been particularly welcome, since insurers have borne the brunt of 2024’s 150 billion US dollars of losses from natural catastrophes. Retentions – or the level at which reinsurance kicks in to help cover losses – have risen dramatically in the past two years, and did not move significantly at 1.1.25. Here’s James Vickers again.
JV: From 2023 there was an adjustment, an increase in retentions – so reinsurers were not too badly affected by [the 2024 catastrophe losses]. That was pretty uncomfortable for a number of primary insurers, and certainly that is continuing to drive a demand for volatility protection at the bottom end, on the property side, because reinsurance buyers used to be able to have those covers, but pre-2023 they all went away. They're pretty useful covers, and buyers would like to have more of them. And there were signs, again, of a slight easing in the market, a bit of differentiation, in that for traditional aggregate covers, some people were coming back to the market. And there was a little bit of additional placement for structured covers. These work very well for some particular buyers. There's a lot of competition coming in on that, and people are happy to write that business. But what most buyers would like is aggregate cover on a traditional basis, and as I say, there was a little bit of that coming in, but not that much.
MC: The return of flexibility and differentiation to the reinsurance market was probably best illustrated by a widening of the range of final outcomes, according to Ditte Deschars. This is something that the headline averages for risk-adjusted rates are always going to obscure.
DD: Another differentiator from last year is that I think that the averages that we are talking about after every key renewal, they mean less and less. Because the ranges of deviation from averages were quite substantial this year, and they were much driven by client differentiation, but also by individual clients’ objectives. So, for some, you know, price reduction was the main goal. But for others, it might be to get a trickier placement home, like, for example, an aggregate and that then drove the trade-off with a cat pricing, for example. So, it was a much more diversified and individually driven outcome. So, for example, a plus-1% risk adjusted increase might have been perceived as more successful for one cedant than a minus-five for another.
If I'm looking at firm order terms of cat XL programs, for loss free programs, they were single digit minus. But there were some programs that got much more than that, i.e. double-digit risk adjusted reductions, and there were some who got a bit of risk adjusted increases. But the clients were thinking it was not a bad placement or a good placement. There was a story behind why those prices were there. And actually, I would say that therefore this range around the averages is larger this year than what I've seen in previous years, and therefore I would say that the averages are a bit less indicative.
MC: That’s all we’ve got time for in this first episode, but in the next, we will dig a bit further into that story behind the headline figures. In particular, we will take a closer look at some of the challenges insurers faced at the January renewal – despite the generally improved mood music – and how we worked with our clients to overcome them.
