In common with previous years, renewal information was delivered in an orderly manner and roughly on time and structures, for the most part, were decided as the renewal packages were delivered. So, what made this renewal season worthy of comment?
Essentially, it all seemed to be going smoothly – and then the wheels came off. What led to the disconnect between buyers and sellers? There is no simple answer, but a variety of reasons led to a standoff:
- 2021 losses – and to a certain extent 2020 losses, particularly COVID-19 – continued to increase. These were for the most part non-modelled perils with little consideration in the premium.
- Some reinsurers either exited the London Market at the last minute or announced reduced capacity.
- All reinsurers communicated their desire to move away from attrition, particularly aggregate deals.
- Retro capacity was substantially reduced driven by a combination of trapped capital and genuine risk appetite changes. The retro impact is exaggerated for smaller, less diverse, and capital hungry entities.
At the same time, macro influences impacted on the placement and pricing of programs:
- Climate change – the impact of climate change can really be felt in the low-level attachment layers and the aggregate programs, both of which struggled at renewal.
- Inflation – a broad catch-all which encompasses normal price inflation, which is prevalent across the world, social inflation, post-loss inflation, supply chain inflation. All of these make reinsurers nervous when assessing exposures and potential losses.
- Reinsurers continued to differentiate between clients. Differentiation covers many different angles other than price for example: loss experience, claims performance, management strength, business strategy, and the depth of the client relationship.
- There was a huge divergence between loss impacted accounts and clean accounts.
- Profitability – whilst insurers have been enjoying profitability in recent years, reinsurers have been heavily impacted by losses. Profitability has, therefore, been eroded creating tension at capital provider level.
How did it all end up? Once these hurdles were successfully negotiated, programmes did not struggle to get placed, which demonstrated that, unlike the very challenging renewal seasons during the early 90s and post-9/11, capacity was sufficient to satisfy demand. The temptation to compare renewal seasons with those of the past, particularly the hard market of the 1990s, is difficult to do as there are fundamental differences; the late 80s and late 90s witnessed a period of severe losses that impacted multiple lines of business. At the same time, a tidal wave of long-tail losses washed up on balance sheets. Also, carriers lacked the benefit of cat modelling tools, so risk assessment was very challenging!
In terms of hard facts on rate changes for the renewal season, this is not the forum for that as every entity measures rate changes in a different way. Subjectivity abounds. However, I am sure all parties would agree that rate changes for 1 January renewals were positive for a robust reinsurance market.
What does the rest of the year hold for all of us? It will not get easier in the short term, that is for sure, particularly as the impact of retro cost and availability becomes apparent. My advice to all parties is pretty simple: keep communicating, start the renewal process as early as possible, manage expectations openly and as promptly as possible – and keep emotion out of the negotiations.