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Insurer in Full: Covéa repricing suggests Europe heading the way of US for 1.1 cat renewal

Market resistance to firm order terms (FOTs) issued for Covéa will do little to encourage European cedants that they will be spared the hard market conditions that have turned discussions around the US cat renewal away from price to a scramble to secure capacity...

The Covéa renewal is regarded as one of the bellwethers for the European cat treaty market with discussions typically under way early for the placement of the French insurer’s program.

But this year the process is running significantly later than usual in a renewal season that has largely been frozen on both sides of the Atlantic with very limited quoting and true FOTs issued.

Multiple sources said that Munich Re – a lead market on the excess of loss treaty – had initially quoted an increase in the 15-20 percent range including one free reinstatement. 

The move was met with significant resistance from others in the market however, with at least one reinsurer thought to have had a $200mn+ line on the expiring cover immediately declining the terms.

With developing French hailstorm losses also a factor, the deal is understood to have repriced twice, to now include a reinstatement at a 100 percent additional premium.

Rate increases have not been confirmed but sources said on high-attaching layers with rates on line (RoLs) in the low to mid-single digits pricing would be expected to double. 

The identity of the reinsurer taking the lead on declining the Covéa terms has not been confirmed.

But RenaissanceRe is among those reinsurers that have been public in defining their stance at the current renewal with a wish list of changes required to support cat programs.

Sources said the Bermudian is among those typically not accepting initial FOTs as they are unlikely to meet its requirements on price and terms.

Low ROL v risk-free rate

The dynamics of the US and European renewals contrast in a number of ways, with a huge supply-demand imbalance for peak zone cat stateside estimated at $40bn to $50bn and the compounding impact of another year of significant cat losses driven by Hurricane Ian.

In Europe it is largely reinsurer appetite that is at the centre of the battleground, along with cat activity of the last two years.

But European cat pricing is coming off much lower levels, particularly higher up programs, which is leading reinsurers to push for dramatic increases on layers which have sometimes been priced in the low single-digit RoL.

Buyers and brokers are not helped by the shift in economics around the relative cost of capital and associated return expectations. 

As capacity has been significantly more constrained at many reinsurers, the risk-free rate has also moved up meaningfully.

The 10-year treasury rate in the US has been in the 3.5 to 4 percent range during the fourth quarter with the three-year treasury rate reaching almost 4.7 percent in October, compared to less than 1 percent this time last year. 

“What is the point of earning two-and-a-half or three RoL sitting at the top of a cat tower when you can earn more risk free with T-bills,” asked one Bermudian underwriter rhetorically.

The uptick is one factor that is likely to have made deployment of capital to higher cat layers at a low RoL less attractive, even as the trend at the last two renewals has been for reinsurers to move up towers away from attritional cat losses hitting low layers.

10-Year Treasury Bond Yields…

European resolve

Sources in Bermuda last week told this publication that there are growing signs of true resolve being shown in Europe.

“Brokers have almost given up on fighting in the US. They just want quotes now and capacity and to get the market moving. The battleground is more in Europe but it looks as if they may be slowly losing the battle to keep a lid on rate increases there,” said one senior market source.

Another executive observed that European buyers have become used to being able to buy affordable capacity up and down towers including free reinstatements with the structures they choose.

“All of a sudden you’re told you’ve got to buy paid reinstatements, and your retention has gone up even more, along with rate increases,” they said.

That is leading to “proper discussions” at the board level of European cedants as they weigh the possibility of buying less coverage to manage budgets while addressing volatility. 

US repricing and repositioning

In the US there had been little activity in the issuing of true FOTs and limited quoting for this stage of the renewal.

The stasis has in part been driven by a number of reinsurers being uncertain of their capital position when it comes to deployment at 1.1 as they wait for the retro market to open up in meaningful fashion. 

One notable exception was the $1.25bn limit North Carolina Farm Bureau – as revealed by this publication last month – but sources say market resistance also led to a rethink around peril coverage and exclusions.

It also comes as a number of market leaders have come out with different stances around their approach to the renewal.

As previously reported, RenRe has detailed a step-change approach to cat, which includes substantial rate increases whether or not loss-impacted; increased retentions; tightening terms and conditions; narrowing coverage to named peril only; offering non-concurrent capacity and private placement on deals; requiring broad participation at improved economics across cedants’ programs; and retrenching from deals where those conditions are not met.

Meanwhile, Swiss Re has sought to drive home its so-called “double-double-half” approach, which includes doubling rate and retentions for clients it deploys capacity to.

“Brokers have almost given up on fighting in the US. They just want quotes now and capacity and to get the market moving”

The reinsurer is operating in an environment where its reported shareholders’ equity has halved from $23.6bn to $11.9bn in the first nine months of 2022.

With a range of demands and stances from reinsurers as well as limited quoting, buyers and their brokers have been attempting to gauge the market with indications and preliminary FOTs.

Sources said that is a challenging exercise for brokers but also for reinsurers when a greater volume of FOTs starts to come through to the market this week and next.

“If you sign up in a traditional market way and do what the broker wants by signing up to FOTs, what does that mean for you as a reinsurer? If you’re signing up to those terms there’s a risk that down the line better terms will come and that doesn’t make any sense,” said one reinsurance executive.

There is anecdotal evidence of some reinsurers looking to hold back at least a part of their capacity for the inevitable shortfall covers that will emerge in the current dislocated market.

One senior reinsurance executive questioned the blanket approach by some rivals to tightening terms and conditions in addition to price.

They said the utility of the product would become questionable if reinsurers will only look to attach above recent historical loss events, with named perils only coverage, regional restrictions and major rate increases.

“I think we need to be selling a simpler, cleaner, better defined and better paid contract. But the idea you want to move all the way up the towers away from the risk and still get 30 rate on line is a bit silly,” the source suggested.

 

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