Blogs
WILL BROKERS REQUIRE GREATER INNOVATION AT RENEWAL AS REINSURERS CHANGE APPROACH?
The 1 January renewals are expected to see a further hardening of reinsurance rates as the market faces a broad range of challenges.
The economy, war in Ukraine and the rising inflationary pressures have combined to place new pressure on the traditional reinsurance sector, which has resulted in many leading figures in the reinsurance market predicting that the market will see further hardening.
In the property catastrophe classes, the impact of climate change on the frequency and severity of secondary weather events has further strengthened underwriters’ resolve, with appetites reducing for participation in risks that are deemed to be significantly catastrophe exposed. The only issue is that the events in the first half of the year have broadened the geographic areas that fall into the high-risk category, with Munich Re describing Europe as an area which is now seen as a heatwave risk.
For the primary market and its reinsurance brokers, there are significant challenges to navigate in the weeks to come as the negotiations over the 1 January renewals intensify.
It has seen many seek to find fresh solutions as it becomes increasingly clear innovative responses are required as capacity becomes ever more constrained.
Kishore Krishnan, Head of AdvantageGo
Ross Howard, global executive chairman at Lockton Re, says the discussion around property catastrophe reinsurance at the recent Monte Carlo Rendezvous has left many in the market waiting to see if the underwriters’ approach will turn out to be reality or rhetoric.
“It is a little unclear at the moment as to just how much of the concern that reinsurers were showing, in what has always been the opening discussions of the 1/1 renewals, will be simply rhetoric or intent,” he explains. “Clearly there are challenges. Inflation is a big issue for the property classes in terms of the costs of claims.”
“How long the current climate of high inflation will last no-one really knows. However, double digit inflation has the potential to provide a serious challenge to underwriters.”
While much of the talk has been in the property cat classes, Howard says there are concerns of the impact in the casualty business as inflation has the potential to compound claims values in the months and years to come.
“The need for accurate information in the pricing of casualty risks is significant,” he adds. “You have taken a risk in 2016, 2017, or 2018, and you have priced that risk with no understanding of the change in inflation rates in 2022. Suddenly you are paying out claims in 2023 2024, with inflation at levels that simply were not envisaged or factored into the pricing. A tail such as this can wipe out previous underwriting years. I think we are all concerned as to how this may play out.”
Howard says the recent renewal seasons have been an indication of the challenges faced by brokers and cedents as the cost of cover and its availability remain difficult.
“The Florida renewals were a struggle, July was a struggle and 1/1 will be a tough renewal due to concerns over the availability of retrocessional cover,” he explains.
He says increasingly the market is looking at the alternative risk market to fill the potential gaps in cover. The broker has recently launched a capital markets operation and it is a move that Howard said reflects the need to ensure that clients have the ability to access all options for its programmes.
“Lockton Re Capital Markets (LRCM) has already become a key component of the business, and is designed to serve clients by accessing broader pools of capital, thereby providing complementary solutions to existing client offerings,” he explains.
“I think it is true to say that any programme at renewal is likely to have potential alternative risk capacity on offer as a solution, given that there are concerns that some programmes will not be able to access the required level of capacity from traditional market sources,” he explains. “That is not to say that the ART elements wilk be used, but I think that brokers have to have that capability to ensure that clients are offered every option to consider.”
He adds: “As brokers we have to be agnostic. We simply need to put the options in front of the client and not seek to incentivise either them or us to make a particular decision.”
Howards adds that the moves to increase the use of technology in the industry in the market, and London in particular, is making a difference but that the market is still reliant on the expertise within it.
“London contains a high amount of human capital and experience which has served it so well. What technology had brought is significant levels of data which is so much better than say five, ten or 15 years ago. That data allows the underwriters to understand their risks in far more detail and therefore the knowledge is so much better.
“So much is going in in the background but the job reminds the same.”
Howard says the message to their insurer clients in terms of the approach to the 1 January renewals has been simple:
“We have been saying ‘get out early’. There have been some structured efforts to go early in order to lock down big blocks of capacity. The market is highly likely to get tighter as the renewals get closer to 1 January, so it is better to go early.”