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Decline and Differentiation – 1/1 digested

Two insightful Voice of Insurance podcasts with Senior Broking Executives from Gallagher Re and Howden Re illustrate the recent 1 January reinsurance renewal.

Reinsurance renewals on 1/1 saw rates slide, but from a high place, while data and differentiation were able to convince reinsurers even about casualty concerns.

This was the compound conclusion from two Voice of Insurance podcast episodes, the first with David Flandro, head of industry analysis and strategic advisory at Howden Re; and the second with James Vickers, chairman of Gallagher Re International.

The two brokers both put out meaty reports dissecting 1/1; Howden Re’s was entitled “Past the Pricing Peak”, and Gallagher Re’s was called “Differentiation Rewarded”; and unsurprisingly, those messages are two leitmotifs of Flandro and Vickers’ comments.

1/1 marked the first “across the piste” decline in reinsurance rates since the same renewal in 2017, according to Flandro.

“If you look at everything property, casualty and specialty, and you take the average, this was the first time in about six or seven years that we’ve seen rates decline,” he says.

The market is also beyond the capital trough, and terms and conditions tightening, he says, since giving way to increased capacity and more competition, especially for loss-free programmes.

Supply is exceeding demand, in essence. Howden Re measures dedicated reinsurance capital as a measure for supply. Howden Re’s analysis estimates $463bn of dedicated reinsurance capital, an increase of 10% that’s been supported by the growth in asset values for traditional carriers.

Vickers agrees, emphasising reinsurers’ appetite for growth.

“The bulk of the capital growth has come from the retained earnings of the major reinsurers, and they clearly want to put that to good use. What was noticeable this year as compared to 2023 where reinsurers were still well capitalised but were nervous about putting their capital to work, this year, they wanted to grow,” Vickers says.

Property catastrophe limits increased “a little”, he suggests, but, in return, the growth was not enough to meet reinsurers’ ambitions.

“Unfortunately for them, the amount of growth was relatively limited. What we’re beginning to see is the unwinding of the high inflation impact that, particularly in the Western markets, in Europe and US, [which] has helped to boost underlying growth,” Vickers adds.

The bulk of capital growth has come from retained earnings among major reinsurers, something that was already evident a year ago, but reinsurer sentiment has changed, “wanting to put that capital to good use”, according to Vickers.

Supply is coming back into the market, Flandro observes.

Reinsurers have experienced profitable growth, with the best hard market peak experienced since the 1/1 after Hurricane Katrina (2006), and possibly Hurricane Andrew (1/1 1993), the scale of which trigged catastrophe risk modelling.

“2023 was the golden year. The end of 2022 would have been the optimal time to invest. That was when everyone was fearful. An astute investor would have been greedy,” Flandro says.

Prices are still high enough for reinsurers to feel good about increasing their appetite.

“Rates remain very elevated, and we now have a couple of years of loss experience pursuant to the terms and conditions set at 1/1 ‘23, to prove it, and the capital is now starting to come in.”

He sums this feeling up with a nice analogy: “The water is still warm – it’s still fine.”

The imagery is backed by statistics, citing economic value-add, which goes beyond return on equity, to include return on debt as well as equity, relative to cost of capital.

“It’s notable that the economic value-add of reinsurers, particularly in Bermuda, but also in London and elsewhere, is higher than it’s been for a very long time,” he says.

“That’s commensurate with heightening reinsurance share prices and a lower cost of equity, because you have a cheaper cost of issuing equity, if your equity is more expensive. All of that together means that we are at a profit peak for the cycle,” he adds.

As a further feel-good factor for reinsurers, demand went up along with supply. Flandro describes it as “robust”, with premiums rising to $433bn.

“If you zoom out even further and look at commercial insurance, one of the remarkable things about this renewal is that exposure driven premiums increased for the first time since 2019. Reinsurance exposure, insurance exposure, loss penetration, insurance penetration – all of that grew in 2024 for the first time since 2019,” he says.

The rise in demand was in part due to moderating prices, but also reinsurance’s relative attraction as a form of capital, “particularly contingent capital, and particularly in the tail”, he notes.

The increased appetite of reinsurers represents an opportunity for brokers to get covers for their clients that were impossible – or prohibitively expensive – just a couple of years ago, something Flandro says the brokers have front of mind.

“If you’re a reinsurer, your balance sheet is incredibly valuable to your clients right now, and our job as brokers is to make sure that everybody gets the optimal outcome, particularly clients,” Flandro says.

Differentiation focus

Overall, 1/1 was a market that rewarded insurers who could demonstrate sound data and differentiation within their portfolio, Vickers emphasised.

Amid a blog mainly about market forces, this is at its core a technology trend. The availability to data to replace uncertainty within pricing, is fuelling this leitmotif of differentiation, as host Mark Geoghegan probed, something Vickers wholeheartedly agreed with.

“20 years ago, this data wasn’t available, even if it was available, the actuarial techniques that computing power wasn’t there to deal with some of these big data sets, to try to turn it into something useful that a reinsurer could get their head around,” Vickers says.

With more and better data to show reinsurers, cedants, via their reinsurance brokers, are able to demonstrate the merits of their portfolio, and their own management of those risks, soothing the concerns of their reinsurers – and getting discounts in return.

“Analytics are at the heart of it,” Vickers continues. “Reinsurers want to grow, but they want to convince themselves that the risk they’re taking is adequately priced, and the more data they can have to convince themselves that this 10% rate reduction is justified, to write this business as a decent margin, they’re happy to do that. The reinsurers themselves are getting a lot more sophisticated in their pricing, so they are more demanding, and they go into far greater detail.”

Casualty concerns

With the absence of a systemic-level hurricane hit in 2024 – instead, two very near misses – the focus has been on casualty business. Vickers underlines that nowhere is the differentiation emphasised by Gallagher Re’s analysis of 1/1 more relevant than in negotiating reinsurance for casualty business.

“Something that’s often forgotten is that you can look at certain classes of casualty business, and then if you look at the top quartile primary underwriters, and the bottom quartile, the difference is stunning; in some cases, 70-80 points difference. Teasing that out and giving reinsurers the confidence that your underwriting is producing this dramatically better portfolio, is crucial,” Vickers says.

Some reinsurers are shying away from casualty, thinking aggregate rate rises on the primary side are still insufficient to offset loss trends within this long-tail business, while others are content to maintain or even increase their presence, based on cedants being able to demonstrate differentiation, Vickers stresses.

He suggests general comments on casualty “are misleading” because of the nuance caused by this variance between the performance of individual portfolios, and the many lines of business within the class.

Flandro emphasises the need to distinguish between the many lines of casualty business, as well as between US and rest-of-the-world trends. Reinsurers and brokers are doing more “surgical analysis” of the portfolio loss year trends within all these strands of business, he notes.

Accident years between 2013 and 2019 are under scrutiny for commercial auto and reinsurance liability, but areas such as workers’ compensation and anything shorter tail are in reserve surplus, evening up the overall picture, he suggests.

Flandro looks back on the liability crisis that still haunts such conversations, something he thinks is inappropriate. “This is not that,” he says. “What’s happening here is that we’re just experiencing a normal cycle. I don’t believe it’s a crisis.”

While reinsurers attitudes to casualty may differ, in the aggregate, from a broker or buyer’s perspective “there was adequate capacity, people got everything done they wanted done”, Vickers summarises.

Property cat

Rate-on-line (ROL) in property catastrophe was down by 8% at 1/1, risk-adjusted, against last year’s 3% rise, according to Howden Re. However, all of that has to come in the context of the 37% hike seen at 1/1 2023.

“It’s really important to note that we’re coming off of a very high, high,” Flandro says.

Flandro’s ROL index is not a like-for-like premium index, based on limit, but rather using exposure as the denominator. He stresses the need to begin any analysis with several years of context.

“We’ve been through the most capital volatility in the sector since the financial crisis,” he says. “By our measure, 1/1 ’23, was the highest level of risk adjusted property catastrophe pricing since the advent of cat modelling.”

For the two 1/1 renewals between 2020 and 2022, cedants retained about 54% of modelled cat losses, Flandro reveals, with reinsurers assuming 46%, citing the broker’s ‘Tiger Eye’ layer simulation tool.

“By 1/1 ‘23, and further into 2023, we got all the way down to 67/33, and that was quite extraordinary,” Flandro says.

While he was quick to say he doesn’t yet have enough data in detail, it is clear that the ratio of retentions will have moderated again and gotten closer to the pre 2023 peak.

“There’s still quite a long way to go, and many reinsurers would argue that 54/46 was probably too close, and that’s why rates needed to go up, but those retentions got up to an all-time high,” Flandro says.

With each new hurricane season “looming in the back of one’s mind” is the probability of a several hundred-billion-dollar cat event. Flandro warns about “brushing off” the two big hurricanes last year – Helene and Milton – both of which represented “very close calls”, he emphasises. “I would be loath to say that the storm is over,” Flandro adds.

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