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The Insurer In Full: Hardening momentum continues at 1/7 reinsurance renewal

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  • Topics:
    • Alternative Capital
    • Casualty
    • Claims & Losses
    • P I (E&O)
    • Property - North America
    • Rates
    • Topical Trends

Although there has been nothing like the market dislocation and magnitude of rate increases seen at the Florida-focused June renewal...

...the momentum of tightening pricing and terms and conditions has continued on property, casualty and professional liability for US cedants at 1/7, a key renewal date for many North American insurers.

As a relatively “orderly” renewal process comes to a close this week, multiple sources say that property excess of loss (XoL) treaties are typically pricing up in the high single digits to low double digit range depending on the loss record and individual characteristics of the programme.

Property pro rata deals are seeing between one and four points of improvement for reinsurers, depending on the performance of a cedant.

In casualty, sources have pointed to more modest improvements in cedes on quota shares of one to three points of reduction, but with deals boosted by surging rates on the underlying business with many classes now in true hard market territory.

A senior reinsurance broking source told The Insurer: “Overall to me it’s a logical market: where rate is really needed it’s going there. Reinsurers continue to be more selective about who’s a core client and who’s an opportunistic client and they’re pricing it accordingly. The reinsurance market is standing up.”

For 1 July renewing property treaty business the dynamics are very different from Florida, even though both renewals involve the cession of significant amounts of hurricane and other peak peril risk to the reinsurance market.

The Sunshine State has its own unique set of characteristics, with more thinly capitalized homeowners carriers typically attaching relatively very large cat covers low down and their reinsurers having taken significant losses in recent years compounded by creep from events such as Irma and Michael.

“Brokers have been pretty candid with clients and not overpromised about getting things done that aren’t achievable and have been messaging to clients that pricing has got to go up because the cost of capital has gone up”
Senior reinsurance broking executive

Some buyers in the state are also viewed as having taken a commoditized approach to reinsurance capacity with a willingness to push relationships to one side and switch up panels to force down price in the recent soft market.

Although some Florida carriers are considered core by reinsurers, the majority are not, which meant at this year’s renewal the more distressed and less favoured cedants faced rate increases at the top or even above a 20-30 percent average range for the market.

Core clients renew at 1/7

In contrast, the large US property treaty accounts such as Travelers, Zurich and FM Global that renew at 1 July are seen as core by reinsurers – especially where they have multi-line portfolio relationships with the carriers.

In the case of insurers like Travelers and Zurich, property cat covers typically attach high up and further away from losses.

There is also a lesser reliance on collateralized reinsurance on accounts renewing at 1/7 which means that buyers are more insulated from the impact of capacity drying up in that segment – a phenomenon that had a major impact in Florida.

“But it is still high single digit to low double-digit increases depending on the programme,” a senior reinsurer executive told The Insurer.

“There is also a push for a changed terms and conditions, including infectious disease exclusions, and tightening of terms with less multi-year treaties,” they continued.

Sources also noted that one feature of the Florida renewal had carried over to 1/7 with cascading structures – largely seen as a soft market phenomenon – all but disappearing this year.

As previously reported, several reinsurers – led by RenaissanceRe – had pushed to have the feature removed from Florida renewals, while Everest Re had put out a blanket refusal to write deals with cascading aggregate covers nationwide in the US.

There had initially been strong pushback against reinsurer attempts to impose infectious disease exclusions from some of the largest cedants, although there had been some backing off as the renewal deadline neared, sources said.

US reinsurance rates facing upward pressure...

Another senior executive from a reinsurer told this publication that property quota share and risk placements had been completed “but not without challenges”.

They said that all deals were seeing pandemic exclusions applied, despite attempts by some cedants to avoid them.

On proportional property deals they suggested some deals had seen cedes down as much as 5 points, though most were around two points lower.

Loss-affected accounts were on course to see XoL rate increases in the low double digit range, and several points reduction in quota share cedes, sources said.

FM Global losses

Although details of the FM Global renewal are not known, The Insurer has previously reported that both the XoL cover and CRT proportional structure are likely to have delivered losses to reinsurers, including the impact of a series of large losses in the year-to-date and Covid-19 claims.

The US mutual insurer offered communicable disease sub-limited coverage as standard in its property policies.

It is understood to have notified reinsurers on its $1.35bn xs $450mn Willis Re-placed cat programme relating to Covid-19 losses.

Sources said that the expectation was there would be a reduction in cede for the big-ticket premium CRT quota share, although less than reinsurers were hoping for.

“But it is still high single digit to low double-digit increases depending on the programme. There is also a push for a changed terms and conditions, including infectious disease exclusions, and tightening of terms with less multi-year treaties”
Senor reinsurance executive

As reported by this publication, FM Global has dramatically reduced its standard sub-limits for communicable disease in the lead up to the renewal and is thought to have been pushing to avoid an infectious disease exclusion on the quota share at least.

On property renewals underwriting sources suggested that brokers had been taking a cautious approach to the market when it came to issuing firm order terms.

“Brokers are not calling them final terms; they’re saying ‘here’s where we see final terms are likely to land at, if that was the case what would be your line’ as they try to see how it pieces together,” said a senior executive.

Generally, broker and reinsurer sources polled by The Insurer said there had not been any meaningful increase in limit purchased at this renewal, unlike some of the moves earlier in the year by carriers including AIG, QBE and Hiscox to buy additional protection.

Casualty loss trends

In casualty treaty, sources pointed to a less consistent picture on deals renewing at 1 July, depending on reinsurers’ views on rate adequacy and loss trends on the underlying business.

Although the trajectory continues to be upwards on XoL pricing, the rate of increase varies by segment and client performance.

There also appears to be a range of views among reinsurers over casualty loss trends and the loss picks of the insurers they support.

“So even though the rates are going up in many cases, reinsurers have different views on whether it’s sufficient.

“That’s the same on proportional, where commissions are coming down but the question of whether that is enough is really on a case-by-case basis,” said a senior executive.

Another source said that while professional liability is “in a good spot” for reinsurers given the magnitude of rate increases on the underlying business – despite the emergence of losses – casualty insurance rates in some areas are still as much as 30-40 percent below where they need to be.

A third casualty reinsurance underwriting source commented: “In general, nothing is flat, not even one deal. Even on a good account with strong underlying rate increases the cede is going down a point. And on deals that have any kind of loss the cede is going down two to three points.”

Major casualty and professional liability treaties understood to renew at 1 July include deals for Axa XL, Axis and Arch.

Casualty lags

One senior executive source suggested the casualty and PL treaty market is about six months behind property, but is gaining traction.

They said that there had been limited success to date in pushing through higher rates on XoLs and that clients appear willing to increase retentions to overcome any shortfalls in capacity.

Meanwhile, reinsurers have not yet shown a willingness to pull capacity, because original rates are climbing so significantly.

Similar to the property segment, casualty reinsurers are focusing on terms and conditions as well as price, with wordings relating to the Covid-19 at the centre of negotiations.

“In general, nothing is flat, not even one deal. Even on a good account with strong underlying rate increases the cede is going down a point. And on deals that have any kind of loss the cede is going down two to three points”
Casualty reinsurance underwriting executive

One source highlighted the challenges of agreeing consistent wordings when underlying exposures remain so fluid.

In healthcare liability, for example, some states are providing immunity to doctors in relation to Covid-19 claims, while others aren’t.

“There’s a lot of uncertainty right now and it’s difficult for insurers and reinsurers to come to a landing on a wording,” said a source.

Another executive added that while communicable disease exclusions are more widely appearing for treaties covering primary casualty exposures, there’s a reluctance from insurers to accept an exclusion on excess casualty treaties.

Sources have also pointed to early signs of a shift from proportional to non-proportional treaties on some accounts where the economics of reinsurers pushing significantly lower commissions means the economics are not longer workable for the cedant.

The move – so far only seen in isolated cases with account specific drivers – is also likely to reflect a greater emphasis towards reducing volatility for some cedants.

Prelude to 1.1

After the mad rush and challenging negotiations of the June renewal, the relative serenity seen at 1 July may have been welcome in some quarters.

But it is also being seen as a prelude to next year, with multiple sources expecting momentum to pick up pace towards the key 1 January 2021 renewal.

One senior reinsurance executive said he believes that 2020 has represented the hard turn for the property market and is setting up casualty and professional liability for 2021.

The surging rate increases on the underlying business are masking adverse development, which is only expected to become more visible as time passes.

Meanwhile, the interest rate environment and outlook mean that future investment yields will be near zero for some time as Central Banks continue to support attempts for a post-pandemic recovery.

For a reinsurer that means there is effectively no float, which means they have to focus entirely on underwriting margin.

The economics of that underwriting margin are driven by the confidence they have in the underlying reserves – or what they deem to be acceptable development on those reserves – the surging primary prices and likely a ceding commission in the 20s instead of the 30s, said the source.

Another added that the reality for reinsurers is also driven by their cost of capital – especially with the drying up of retro capacity.

“That means front-end pricing has to go up. It’s a simple exercise,” they said

The executive questioned whether all reinsurers are recognizing the increasing power they are now able to wield, even as it becomes clear brokers and clients recognize the market is now hard.

A senior reinsurance brokering source said that reinsurers and brokers have so far taken a pragmatic approach to pricing.

“Brokers have been pretty candid with clients and not overpromised about getting things done that aren’t achievable and have been messaging to clients that pricing has got to go up because the cost of capital has gone up. You can’t have the run of soft market years, throw in Covid-19 and expect pricing not to move,” they said.

But the executive also questioned the behaviour of some reinsurers around service, suggesting that some underwriters have been slow in their responses to broker requests, using changed working practices during lockdown as an excuse as they play a game of brinkmanship.