Rachel Dalton
While reinsurance sources told this publication they are pushing for rate increases of 40-50 percent across typhoon-hit programmes, broking sources said cedants were resistant to the idea of rate rises beyond the 50 percent threshold.
At the same time, reinsurers are exerting pressure on cedants to restructure their aggregate programmes, many of which were heavily impacted in 2018 and 2019’s storms.
This renewal is key as the successive typhoons of the past two years – Jebi, Trami, Faxai and Hagibis – have eaten through the $4bn cushion reinsurers had on Japanese wind risk from retentions and premium, prompting reinsurers to revise their view of the underlying risk.
Although it is early in the negotiation process, with some meetings delayed as UK businesses prevent staff travel to Japan over coronavirus fears, initial signs point to a more adversarial approach in what is usually a conservative renewal.
After a lacklustre 1 January at which the “U-shaped” pricing phenomenon continued, carriers announcing their Q4 results and renewals figures appeared to pin their hopes on large rate increases from Japan and the US later in the year.
Scor Global P&C CEO Jean-Paul Conoscente said the carrier was pushing for double-digit price increases and reconfiguring its portfolio to have less exposure to frequency, while Hannover Re executive board member Sven Althoff revealed an expectation of “significant” 1 April price increases.
Battle over rate
The extent to which reinsurers will achieve rate increases, however, remains to be seen, with sources describing a “fluid conversation” with cedants after their first round of meetings and “no consensus” on pricing.
A senior reinsurance underwriting source said they would push for increases of between 80 and 100 percent on the higher, loss-hit layers, where rates on line are around 2 to 3 percent.
On lower layers where rates on line are between 20 and 25 percent, increases were expected to be far lower, and across entire loss-hit programmes sources anticipated a total rate increase of up to 50 percent.
However, one source said that only a 60 percent increase could provide the margin reinsurers need as their view of the underlying typhoon risk has worsened.
Some sources speculated about the possibility of a reduction of capacity at 1 April as reinsurers grew frustrated and scaled back after several years of underpricing. “The lower layers are now as bad as Florida cat,” one source said.
Another source said that while US cedants buy reinsurance attaching at a seven-to-10-year return period, Japanese cedants tend to buy lower, attaching at the three-to-five-year range, on wind covers, with quake bought at slightly higher return periods.
The market is heavily influenced by Swiss Re and Munich Re due to the size of their shares of Japanese cat business. Sources said, however, that Swiss Re was communicating a tougher-than-usual stance to cedants following large losses last year.
Broking sources were sceptical about whether reinsurers could command increases of 50 percent across programmes, noting that Japanese insurers are strongly capitalised with large reserves, strengthening their negotiating position with reinsurers.
Underwriting sources speculated that Japanese clients and their brokers would argue to spread rate increases across two or three years, rather than taking one hit on 2020 renewals. On multi-year business, this argument will carry more weight.
There is also pressure from reinsurers for cedants to pay uplifts on their earthquake covers, which usually renew on expiring terms, but it is understood that the potential for price contagion between wind and quake risks is limited.
Restructures
Reinsurers are sending robust messaging on pricing of Japanese wind-exposed cat business as initial negotiations for the April renewal begin.
While the picture on pricing is difficult to discern this early, there are strong messages from the market that Japanese reinsurance programmes will be restructured at this renewal.
Several sources said reinsurers would push for cedants to increase their retentions and some added reinsurers were putting pressure on clients to split out all-peril layers into individual risks to allow for more precise pricing.
Aggregate covers have been a particular focus of the past two years as they were particularly hard hit by the frequency and severity of the four major typhoons.
Sources said that cedants paid rates on line in the high teens and early 20s for aggregate covers, and that to renew on expiring terms, reinsurers would want to push rates on line as high as 40 percent. Underwriting sources said that cedants were unlikely to accept such a large increase, however, adding that restructures alongside increases of up to 30 percent rate on line were more feasible.
Reinsurance sources also said they would push for restructuring features such as increases in retentions, a switch from franchises to hard deductibles, exclusions for first or event second typhoon events, and per-event coverage caps.
However, many aggregate covers are written on a multi-year basis, so some may not renew at this 1 April.
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