Reinsurance renewals “challenging but rational” – Gallagher Re CEO Kent

The January 1st 2022 reinsurance renewal season has been particularly challenging, according to Gallagher Re CEO James Kent, with most parties emerging bruised but satisfied after a prolonged set of negotiations that dragged on late due to market losses and capacity issues.

The reinsurance broker noted that retrocession renewals have been especially challenging at January 2022, as capacity was reduced following another year of significant catastrophe losses and the resulting knock-on effect on insurance-linked securities (ILS) fund markets.

Gallagher Re’s first publishing of a 1st View January reinsurance renewals report, since it acquired Willis Re, sees the broker documenting the goings on in “a tense round of negotiations amid a nonetheless well-capitalised industry.”

Because of the challenges, reinsurance renewal negotiations concluded very late in many instances, with a wide range of outcomes also cited by Gallagher Re.

In the end, counterparties settled largely on a client and portfolio-specific basis, with significant differentiation again seen dependent on performance and loss history.

James Kent, Global CEO, Gallagher Re, commented that, “The end of a more challenging renewal season than most has, on balance, provided another rational outcome.

“Reinsurers have managed to achieve further improvements in pricing to build on the increases of the past 18 months, particularly on accounts ceding losses, but may be wondering if they have over-stressed some long-term client relationships.

“Many buyers have managed to secure sufficient capacity knowing the continued improvement in the underlying business has resulted in portfolios that are better balanced supported by largely consistent reinsurance structures to manage volatility and net lines.”

After the catastrophe loss activity experienced in 2021 dented results for the insurance industry yet again, reinsurers have been strongly advocating the need for price increases as the renewal approached.

This is especially the case on underperforming contracts, while areas of the market such as aggregate arrangements have seen particularly steep price increases.

But, Gallagher Re notes that “pressure was not consistent across the market,” as quota share placements on non-cat lines were keenly sought by reinsurers.

On Covid-19, Gallagher Re says it has had less of an influence on the market at this renewal season, with some reinsurance recoveries now starting to move through the market and an increasing number getting settled.

Property catastrophe reinsurance renewals saw rating movements that varied greatly by territory and client at January 1st, Gallagher Re said.

There have been large rate increases on loss-hit property catastrophe reinsurance programmes and, as expected, aggregate and frequency covers have proven to be among the most demanding to place.

Gallagher Re noted that reinsurers have been actively trying to move capacity away from these aggregate or frequency covers, which has resulted in “ceding companies having to use the leverage of other more attractive treaties to achieve completion.”

Buyers of retrocession have experienced some of the most challenging market conditions, the broker said, with aggregate retrocession capacity particularly dented at the January 2022 renewals.

Insurance-linked securities (ILS) funds, who have provided the majority of aggregate retro capacity in recent years, “found themselves with increases in trapped capital and a diminishing investor base,” Gallagher Re said.

Adding that, “Collateralized occurrence and sidecar retrocession capacity was consequently in short supply leading to some reinsurers pulling back catastrophe capacity for primary buyers.”

Loss cost inflation and social inflation were also topics of conversation during the reinsurance renewal negotiations this year, Gallagher Re highlighted.

In short-tail lines of reinsurance this largely revolves around supply chain and labour shortages and how they can inflate claims, while underlying cost inflation and wider social inflation are concerns for those writing longer-tail lines of reinsurance business.

Overall, the majority appear to have secured the coverage they wanted, except for some seeking aggregate retrocession it seems.

But we’re also told that the focus on unmodelled, or less well modelled catastrophe perils continues in negotiations and that this may drive pricing higher at the mid-year renewal season as well.

This does seem a rational response to the loss activity experienced and the outcome of the January 2022 reinsurance renewals is no surprise, given the more challenging run-up to year-end many had.

Reinsurers determination to continued the firming will be tested at the April renewals in 2022, as the regions in focus at that renewal season have not experienced the catastrophe losses of Europe and the United States. So it will be interesting to see what the outcome is in territories like Japan at April 1st.

Renewal rates for Asian accounts at 1/1 have been driven by performance it seems, with those not affected by losses experiencing a largely flat environment.

Capital will also be a determinant of reinsurer success in continuing the firming at future renewals in 2022, so discipline will be a key watchword as we move through the new year.

Read all of our reinsurance renewals news coverage here.