From Disorderly to Orderly Reinsurance Renewals — What a Difference a Year Makes

One of the themes at this year’s reinsurance Rendez-Vous de Septembre (RVS) was that reinsurers have rediscovered client need, client interest and have again started to put clients at the center of conversations, according to Dirk Spenner, managing director at Gallagher Re, EMEA.

On the other hand, the big theme of last year’s RVS was that reinsurers had put their interests at the center of the conversations, Spenner said. “I need this, I want that. I can’t do that anymore, and these are my rules,” he said in a recollection of talks with reinsurers during the 2022 RVS.

“[L]ast year it seemed like ‘cat’ was the bad word of the market,” he said during an interview at this year’s RVS in Monte Carlo. “And if you just said, ‘I’ve got some cat business for you,’ they put the phone down on you. So that’s clearly changed.”

The main change from October, November and December of last year is that the reinsurers now have a much better idea about their risk appetite, he explained.

“They provided a commitment to provide quotes, which again, wasn’t necessarily the case last year,” Spenner said.

Reinsurers have greater confidence to provide a clear commitment of capacity “and they’ve defined where they want to play and what’s off limit,” Spenner said. “And so I think overall that will very likely lead to a much more orderly market.”

This is really core for Gallagher Re clients — that they can go with confidence into the renewal process and will get their programs placed, he added.

“At some point last year, it sort of looked like, okay, well was anyone playing here, guys? And so that’s a big shift in market behavior,” Spenner said.

In pre-RVS renewal briefings, executives from Aon and Guy Carpenter echoed Spenner’s thoughts about the more orderly reinsurance market seen throughout 2023 — after the disorderly January 2023 renewal season — and that order was also expected for January 2024. At the same time, they agreed that rebuilding reinsurer-cedent relationships was essential.

Through the year, it became a lot more ordered with a lot of competition seen at the top-end of programs — a trend that started at the June 1st renewals and is likely to continue, said Andy Marcell, CEO of Aon’s Risk Capital and Reinsurance Solutions, in its reinsurance renewal briefing.

“[W]e are hoping that the reinsurance relationships that were severely tested between clients and reinsurers at the 1st of January … can be rebuilt and reestablished during the coming year,” he added.

“[C]lients are looking for stability, closer reinsurance relationships as we walk into 2024 and to rebuild a stable relationship in terms of capital management with their reinsurance partners, and that is something that they are uniquely focused on,” Marcell said. “And, of course, they’re very, very interested to see how the reinsurers will react to the renewals coming up at the 1st of January …,” he said, noting that about 45% of Aon Reinsurance Solutions’ global cat placements renew at January 1.

“We’ll be pushing for reduction in rates in most places where we see competition, if we see there’s more than adequate pricing at the top end of programs,” he said.

Marcell acknowledged, however, there are places in the world that have had losses, so the question is to see how the market reacts to the Turkish quakes, Italian floods and some of the flood losses in the Nordics.

“But in the main, a lot of the volatility and the losses that have occurred have been at the lower end programs where the global insurers, for example, have managed that in their own ways,” he said, explaining that Aon expects to see some private placements to help cedents manage that volatility.

However, he pointed out that there are many types of different insurance companies, regionals and mutuals and nationals in the global insurance market, and the amount of volatility that is now sitting on their balance sheets “is at a place that is challenging for them.”

“So they will be looking to find ways to get more frequency covered to the extent possible at affordable prices. And I expect that to be an ongoing discussion through 2024,” Marcell said.

Return to Profitability

Spenner acknowledged that “there’s still significant risk out there that the reinsurers are covering.”

Reinsurers forced through

changes in prices and terms and conditions that helped them create a portfolio that’s much more likely to give them a significant profit, he indicated. “And fair enough, after five years of misery, [that’s why] that push was happening last year.”

The question is, how far should that stretch out, can that stretch out and how much pain “was pushed back to the cedents who now have to carry that risk by themselves,” Spenner said.

Cedents made quite a lot of concessions at the end of last year and throughout this year’s mid-year renewals, which has resulted in reinsurers’ producing outstanding combined ratios and return on equities for the first half of 2023, he said.

It’s fair to say that this is only after six months, “and I’m sure everyone in the reinsurance world wants to see [similar results] after 12 months in order to make it a proper good year,” Spenner added. “But the indicators and the starting points are very good and that obviously changes the content of the conversation.”

Spenner emphasized that Monte Carlo only provides early-toes-in-the-water conversations about how everyone’s doing, but “the ‘truth is in the pudding’ and so we’ll see when the quotes come in, how the conversations here transfer into reality.”

Increased Appetites

Some reinsurers are showing increased appetites, going into the renewals, based on the market conditions as they stand today, “which is a bit of a change relative to what we’ve seen in prior years,” said Mike Van Slooten, head of Business Intelligence for Aon’s Reinsurance Solutions division.

At the other end of the spectrum, there are some companies that are still managing volatility as well, so this is an environment where the best outcomes are achieved by navigating those risk appetites, he said.

When asked how long the hard market will last, Marcell answered with a laugh: “It depends on where you are.”

He explained that there’s a lot of competition for property catastrophe risks in excess of a 15- or 20-year return period. The higher up the stack you go, the greater the competition, he said, noting there’s ample capacity and appetite because reinsurers are looking to add that to their balance sheets. However, Marcell did not think there was a significant shift in appetite below 10-year return periods.

While the industry has seen loss activity through a variety of regions such as the earthquake in Turkey, “ceded losses to date remained well within expected loss ratios for the year,” said Tracy Hatlestad, executive managing director and global property segment leader at Aon.

“Last year, obviously, the discussion around renewals was centered around capacity. And this year we think on both sides of the trade, the discussion should really be centered around differentiation of how you come to market for trading with a specific reinsurer or viewing a specific insurance company,” Hatlestad said.

On the reinsurer side, Aon expects a much more orderly renewal season this year, she said.

“And the ways that reinsurers will ultimately show up for that is transparency and pricing and meeting quote and authorization deadlines that insurance companies set for 2024 renewals. But for the reinsurers that are looking to really improve relationships and grow in today’s market, there’s definitely an opportunity to differentiate how you can provide value to insurance companies,” Hatlestad added.

Heading into the January 2024 renewals, Guy Carpenter believes “demand for reinsurance will grow with reinsurers’ willingness to deploy capital also increasing, although underwriting discipline will not subside. Thorough preparation and thoughtful differentiation will enable cedents to adjust their own approach and leverage a range of solutions to transfer risk into profitable returns,” said David Priebe, CEO of Guy Carpenter, in a pre-Monte Carlo briefing.

Adequate Catastrophe Rates?

Lara Mowery, Guy Carpenter’s global head of distribution, commented: “With the significant adjustments in 2023, catastrophe rates are broadly adequate, but their perceived adequacy may be dependent on the ongoing patterns of loss activity and development.”

The total insured large losses for the first half of 2023 currently aggregate to $49 billion, which includes the Turkey earthquake, New Zealand floods and cyclone, Italy floods and US storms, Mowery said.

“These recent losses emphasize the continued importance of individual renewal characteristics and cedent differentiation,” she said, noting that market drivers are expected to extend into next year, as average losses at H1 2023 are 24% above the 10-year historical norm, inclusive of losses from COVID-19 and the Russia-Ukraine conflict.

“While the loss trend for events in excess of a billion dollars is increasing on an annual basis, many of these

events remain of a size that is largely retained by insurers, particularly as retentions on cat programs have shifted up,” Mowery noted.

In addition, a substantial portion of the 2023 loss activity has been generated by U.S. events “where retention increases were material virtually across the board,” she said.

“Given the loss trends and the resulting challenges in the reinsurance market, many cedents have reshaped their portfolios throughout the last 18 months. This includes rate increases that are still working their way through portfolios, underlying product adjustments such as higher insurance deductibles, and managing concentrations,” Mowery continued.

Mowery noted that reinsurers are able to respond fairly quickly within a renewal cycle to revisiting the composition of their business, but it takes time for these adjustments to work through insurance portfolios.

“Cedents have now had more time to begin adapting to 2023 market adjustments, and this may play out in a number of ways at Jan. 1, 2024, including cedents funding increased reinsurance purchasing with growing premiums or alternatively mitigating the amount of reinsurance required as a result of more intensive aggregate management,” she said.