Reflecting on a Challenging 1/1 Renewal season

Insider Engage invited panelists to discuss the impact of the January 1 renewals on the market and what action the industry needs to take amid tough market conditions.

Jean-Paul Conoscente, property and casualty CEO at SCOR, explains that the January 1 renewals saw an “imbalance between supply and demand for cat capacity,” something the market hasn’t witnessed in more than 20 years.

“The 1/1 renewals were very difficult. This tilted the balance in favor of reinsurers who, on the back of many years of underperformance and elevated cat activity, have pushed through on the cat side,” he says.

The renewal period also saw a market reset in the specialty market, and generalized hardening across other lines of business, according to Conoscente.

“One area that was maybe a bit of surprise at these renewals was the specialty area, especially with regard to aviation war, where retro capacity dried up and the risk became very difficult to reinsure,” explains Conoscente.

Furthermore, on the other lines of business, there was more "generalized hardening," he notes. "While this was more than clients and brokers expected coming into the renewal season, it was still not on the same level as property cat."

Lisa Butera, managing director at Swiss Re acknowledges there has been a “fundamental shift” in the property reinsurance market.

“We've experienced the hardest renewal we’ve had in the last decade. We began discussions as early as Monte Carlo about the shift in the property market," she says. "At that time the industry had suffered a few consecutive years of losses in excess of $20 billion, driven by some cats but also from secondary perils.

"The urgency to shift the market was heightened when Hurricane Ian hit shore in Florida,” says Butera. "While there was a shortage of cat capacity, there seemed to be enough to get programs done".

Nick Dranchak, executive vice president of capital management at BMS Group, highlights that a lack of lead capacity caused this year’s property cat renewal to be unorderly.

“There was a timing issue specifically for property. We saw that before Christmas there was not a lot going on, however, the week of Christmas it really opened up and we had far more terms out in the market," says Dranchak.

“The theme was that most reinsurers were taking care of their current clients and then some of those reinsurers would come back and look at new business," he says. There was also a lack of any lead capacity, which caused the property cat renewal to be very unorderly compared with past.”

According to Butera, on the casualty front it was a much more orderly renewal. “On casualty, there was some discussion in the fall about excess ceding commissions where we saw some significant overrides in the market," says Butera.

"There was some push to move those down, but only in cases where they were higher than they should be relative to costs,” she says. “While we saw some downward pressure to balance ceding commissions rates or ceding commissions, commission remained relatively flat.”

There is a lot of discussion in the market around legacy deals being used as a capital management solution.

“In the past if a client was seeking a loss portfolio transfer, or an adverse development cover, that was an indication that company had bigger underlying issues,” says Dranchak. “Today most legacy transactions are being used to free up capital, release collateral, or to reduce fuller volatility in the results. There's a lot of discussion around legacy as more of a capital solution.

“There has been new capital entering the legacy market in the past few months. Increasingly we're seeing legacies being combined with other strategies, such as surplus notes to bolster balance sheets to take more net risk."

Dranchak explains when quota-share does not work, alternative forms of capital might be used.

“Companies look into alternative forms of capital or alternative forms of reinsurance, such as captives," he says. “As far as traditional alternative capital, such as ILS and cat bonds, we did have some alternative capital use to fill holes in capacity at an effective price," he adds.

Dranchak predicts that further into the year the market will see more of that capital move in as that's still an uncorrelated asset, and with interest rates rising we could see more capacity.

While there was an expectation of new capital coming into the marketplace compared to prior cycles, he points out that was not the case, and of the main reasons is there are a lot of questions from the investor community on whether cat is insurable.

“Looking at the capital markets there was some inflow of capital but very limited, and in my view, that's not going to change in 2023. The industry first has to show that it can make money and the changes pushed through the marketplace are sustainable," says Dranchak. “That can lead to profitable outcomes for insurers and reinsurers and then there might be some interest from third party capital.”

Carol Pierce, senior director of insurance at Kroll Bond Rating Agency agrees with this sentiment, and explains that investors are taking a more cautious approach.

“Investors are being very cautious and that's true across the market, not just insurance," she says. "They want to make profit and they haven't been able to in the insurance industry for a while.”

In the past, cat models were developed as exposure-based rating models to supplement burning cost, and according to Conoscente this allowed a more stable view of pricing, especially during periods of low cat activity.

“What we're seeing today is actually the reverse, where in many cases using burning costs leads to much higher expected loss costs compared to exposure-based projections," he explains. “Underwriters need to understand the underlying trends and how to apply these in decision-making. It's a combination of training and experience.”

Butera explains the industry needs to work together to model and price climate related risks. “At Swiss Re we have a proprietary model, and we certainly have baked in more costing associated with secondary perils," says Butera. “If we think about catastrophes and big hurricanes those are the ones we worry about – the big dollar losses. Then consider that the industry at least for the past three years has suffered in excess of $20 billion of losses without really big cats.

“It's not just the US experiencing these weather events, for instance, we have floods in Australia and France," she notes. The global environment really is changing.

"There are a lot of signs of climate change, and if we if we just look at our own industry and the losses we've suffered, in the aggregate they look like catastrophes. Secondary perils have inflicted some pain on the industry, and we need to continue to work together to figure out how we model those, how we price for those.”

Conoscente believes that the models need to include current changes observed in climate patterns worldwide.

The industry needs to team up with colleges and universities to study the impact of climate change on perils such as wildfire or rainfall and flooding, to review whether long-term-based calculations of expected loss are still relevant. “These forms of research will evolve over time. They will be used to better understand data, and to obtain better data to put into the models.”

The changing litigation landscape in the US is one of the main factors driving social inflation, and at Swiss Re they are working closely with brokers and clients on understanding its impact.

“We're watching litigation funding, very closely, in terms of what that means in the US," says Butera. "If we look back 10 years ago, when we talked about litigation funding, we were seeing it in Australia and what the funders were doing there.”

Social inflation has had a significant impact on the casualty sector, and the impact of the Covid-19 pandemic is still being felt. “The casualty sector for the past few years has seen a lot of social inflation. Looking at medical professional liability, auto and commercial inflation social inflation and nuclear verdicts are still a concern,” says Dranchak.

The issue of social inflation is not just impacting casualty lines, it’s also a “big driver in property,” according to Conoscente. “We're seeing claims in Louisiana for Hurricane Laura and Hurricane Ida being reopened with continuing litigation. We see similar issues in Florida as well,” he says.

“The litigation bar is attracting significant investments in order to extract additional payments from insurance companies, which is creating huge pressure on them,” he adds.

Pierce believes economic inflation is an issue every insurance company will deal with for some time into the future.

She points out the way insurers deal with economic inflation now will indicate how sustainable they're going to be in the future. "Insurance is unique in that we price business today but we don't really know what it’s going to cost until those claims come in the future,” she says.

For Butera, it’s important that the industry comes together to tackle inflationary pressures.

“We really need to pull together as an industry to fight this and defend our proposition because it's costing millions of dollars across long tail lines," she says. "We have economic inflation on property, but social inflation in liability lines and casualty is very worrisome.”

Pierce notes that companies that can effectively adapt to the changing reinsurance market so will become more resilient in the future. “Economic inflation is going to continue to pressure companies to look at how they're deploying their capital and the price they are getting for what risk, and that's going to continue over the medium term," she says.

“Looking to the future, those companies that do a good job are going to become resilient. They'll be rewarded in the marketplace by the rating agencies while others are going to run into difficulty.”