‘Hard But More Manageable’ Jan. 1 Renewals; Little Relief on Retentions

The hard reinsurance market in property-catastrophe reinsurance isn’t coming to an end at Jan. 1, 2024, but reinsurers are likely to deploy more of their capacity next year, broker executives said recently.

Dorothée Mélis-Moutafis, North American brokering executive at Guy Carpenter, predicted “hard but more manageable renewals for cedents at January 1,” crystallizing a theme expressed by other speakers from her firm and by leaders of various divisions of competitor firm Aon.

In the days leading up to the Rendez-Vous de Septembre earlier this month, executives from both firms said they foresee 1/1 renewals next year being more orderly than they were last year. But they also believe that primary insurers will continue to be stuck with lower layers of catastrophe programs than they were able to transfer to the reinsurance market before 2023. Capacity will increase only up top, they said.

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

“We are hoping that the reinsurance relationships that were severely tested between clients and reinsurers on the 1st of January [2023], to a degree, can be rebuilt and reestablished during the coming year,” said Andy Marcell, chief executive officer of Reinsurance Solutions at Aon, who admitted to being “quite critical of the way that we cleared as a [reinsurance] marketplace and served our customers” at 1/1/2023. Later in the year, throughout 2023, “the market was much more ordered,” said Marcell, who is also CEO of Aon Risk Solutions, predicting a continuation during the broker’s virtual “Reinsurance Solutions Renewal Briefing.”

Aon’s Mélis-Moutafis said that “2023 pricing and structure conditions have continued to recalibrate from the upheaval that many renewals, but especially property, experienced at January 1, [2023],” going on to review activity during midyear 2023 renewals as an indicator of what’s to come during Guy Carpenter’s virtual briefing. “While we expect the market to remain firm in 2024, negotiations have steadied, and order and concurrence are largely returned to the sector.”

“Lower-layer capacity and aggregates remain highly constrained. However, new capital raised by existing market participants and growing appetites of other established reinsurers saw the overall capacity levels rebound. Middle and upper layers were actually generally oversubscribed,” she said.

Offering a take on cedents’ midyear reinsurance spending considerations, she said, “Robust historical purchasing and mitigation of underlying portfolio concentrations were opposing factors supporting less desire to buy where pricing was unappealing.”

Looking ahead to January, primary insurers’ “extensive and verifiable corrections” to portfolios “over the past years are likely to equate to hard but more manageable renewals,” said Mélis-Moutafis, noting that reinsurer appetites are “clearly growing in response to price, adequacy and supportable structures.”

“Reinsurers will continue to seek out quality programs, and their investment remains contingent on the market expectation of supportable returns,” she said.

‘Right-Sized’ Level of Retained Risk

During a question-and-answer part of the Guy Carpenter’s briefing, Mélis-Moutafis asked colleague Lara Mowery, global head of distribution at Guy Carpenter, to respond to an audience question about whether profitability and stability returning to the reinsurance market could mean that property reinsurers agree to lower retentions instead of continuing the trend of moving away from lower-return periods to avoid rising loss frequencies from secondary perils like severe convective storms.

Although Mowery agreed that capacity is rebounding in the property-catastrophe space overall, “our early indications and discussions with reinsurers [are] that those retention expectations broadly still hold true for reinsurers,” she said.

With retentions of property-catastrophe reinsurance programs increasing, cedents are retaining more losses from frequency perils, like severe convective storms, brokers said during recent briefings.

Aon published research finding that 70% of global insured losses were driven by severe convective storms in 2023, including $35 billion in the U.S. in the first half of the year.

Aon also reported that more than 80% of SCS loss growth from 1990-2022 can be explained by exposure changes, reaching the same conclusion as Guy Carpenter representatives expressed during their briefing—that climate changes aren’t the main driver of severe convective storm losses.

SCS exposures increased at a rate of 8.6% per year during that time, while SCS insured losses rose at a rate of 8.9%, Aon said.

“While climate is a driving force behind other perils, there is little evidence that the climatic factors that drive SCS are changing,” said John Jacobi, managing director within Aon’s Reinsurance Solutions’ U.S. actuarial team, in a media statement.[/sidebar]

Mowery described some of the “tradeoffs” that primary insurers had to make as they structured their 2023 reinsurance programs to “adapt and adjust” to a new level of retained risk—with some insurers taking co-participations, or not buying additional limit at the top of their programs.

“Now that those adjustments have been made, [the reinsurers’] perspective is that retentions are better right-sized to the way that current risk is occurring, and current losses are occurring these days…That is somewhat of a baseline for their expectations,” Mowery said.

Mowery at Guy Carpenter and Aon’s Marcell both indicated that insurers are finding ways around this with the help of their reinsurance brokers.

“There are certain reinsurers looking at providing solutions within that newly retained risk that our insurance companies are facing,” said Mowery. Likewise, Marcell said Aon has had conversations with reinsurers that “want to partner with specific clients in doing private deals to help them manage their earnings volatility.” Noting that he expects that dynamic to continue, he was especially bullish about the prospect of reinsurance competition in high layers of cat programs forcing costs of coverage in those layers down.

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

Mowery expressed a similar view. “As more capacity has come in for the middle of programs [and] the upper layers of programs, there is an ability—at the right price points—to attract client interest to fill out some of those programs,” she said.

Whether insurance companies will actually seek out more limit at 1/1, however, is an open question, she suggested. “Given the loss trends and the resulting challenges in the reinsurance market, many cedents have significantly reshaped their own portfolios throughout the last 18 months,” she said, pointing to primary rate increases, underlying product adjustments, higher insurance deductibles and efforts to manage risk concentrations. With time to adapt to 2023 market adjustments, “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.”

In some cases, “cedents’ greater retained risk throughout renewals in 2023 has led to pent-up demand for reinsurance.” In others, higher reinsurance pricing and structural requirements on cat programs have prompted carriers to respond by “increasing their use of captives, which impacts volatility assessments for 2024,” she said.

This article first was published in Insurance Journal’s sister publication, Carrier Management.