Welcome to Gallagher Re's inaugural post-renewals podcast, where we go beyond the headlines of rate movements, T&C tussles, and retention levels and investigate some of the reasons why 1.1 played out in the manner it did, what lessons can be learned and what we might infer for future renewals in 2023.
In this first episode, host Charlie Thomas investigates January renewals, why they happened later than in past years and how they became a challenge of process and expectation management.
CT: Hello and welcome to this, our inaugural post-renewals podcast, where we go beyond the headlines of rate movements, T&C tussles and retention levels, and investigate some of the reasons as to why 1.1 played out in the manner it did, what lessons can be learned, what we might infer for future renewals, and the difference that the reinsurance broker made for their clients.
Let's begin with a reminder of the January renewals. The biggest takeaway is that despite concerns around capacity, the reality was that most clients were able to obtain coverage, albeit with rate increases and terms and conditions they might have found difficult to accept. And there were fewer holes or lack of placements in the market than some commentators had been predicting. This was a renewal where the challenge wasn't capacity so much as process and expectation management.
I began by asking Will Thompson, head of UK and Ireland Non-Marine Treaty, how he would characterize this latest round of renewals.
WT: Well, there was a lot of uncertainty at the outset of renewal, much more than usual. And this created what some colleagues have quite understandably described as a very tense, late and at times frustrating backdrop to the renewal. However, in the UK, and I, and I'm sure the same for many geographies, we got placements done, including those where there was an increasing capacity required. So, the early suggestion that there may be some major revisions to the basis upon which reinsurance products are sort of designed and our clients rely upon — that there'll be some sizeable shortfalls, placements will continue into Q1 — that just didn't materialise.
CT: Ditte Deschars, regional director and Head of Nordic at Gallagher Re, largely agreed, noting the need to have plans B and C ready for when events didn't run according to plan.
DD: I think the one thing that we noticed quite early on is that you had to have backup plans running in parallel, to ensure that clients were not only relying on the very late and sometimes dogmatic view of long-standing reinsurance partners. And whilst overall, the placements got home, we saw this incredibly rigid shift in just a few months' time. And it almost felt that the reinsurance market wanted to make up for 10 years of soft market in just two months' time before the inception. And I think this has left many clients very perplexed as to, you know, the usual visibility that we've had on the marketplace and what has been perceived for years, there's a very reliable continuity of the traditional reinsurance market. And I think this has totally changed following the 2023 renewal...
I think the biggest difference in this renewal was that clients' reinsurance strategy — and when I say strategy, I mean mainly around capacity and retention levels. Historically, this has been determined and set in the summer, if we're looking at 1.1 renewals, whereas this year, the retention strategies became very much of a moving target. And which was finally determined very late in the renewal based on how the hardening of the market evolved. So, I would say the balance between these rising cost versus assumed volatility had to be put up to senior management of our clients. And the pressure that clients were under was very difficult to understand. And it was very difficult for insurance companies to understand that, especially if they hadn't suffered frequency of losses in the past. So the reality is that the market was simply not prepared to offer the same level of attachment points as they'd had in the past. And this was this was very different from what we've seen in the past.
CT: International Chairman James Vickers was among many Gallagher Re colleagues who noted the challenge of trying to find consensus among reinsurers about where the market clearing place was going to land.
JV: A limited number of reinsurers were prepared to be upfront, had confidence in their own internal pricing models, the confidence in their own capacity, their own view of risk, to put out terms and conditions but far, far fewer than in previous years. So that led to the frustration from clients not knowing what the market clearing price would be. Also, to be fair, initially a bit of a shock about how severe the terms had been compared to what they might have been expecting. And clearly, particularly in this country, and then places like Europe, what they have seen historically, for the last couple of decades, you put all of that together, the market only really coalesced in early December, which was extremely late, which led to very stressful renewals, led to a difficulty to differentiate between clients. All the renewals all coming in all at the same time. You had small teams of underwriters, in some cases, having to review you know, 500 submissions in the space of 10 days. It just doesn't really work.
CT: That lack of consensus until very late on was particularly noticeable in some of the more challenged specialty lines. Nick Croxford, Head of Marine and Energy at Gallagher Re picks up the thread, explaining that for whole of account or composite-type policies, the desire to tighten up the scope of coverage resulted in major changes to some of the additional risks, such as aviation war, political violence and war on land.
NC: Because of a number of factors, but principally brought together by the Russia-Ukraine war, some of those coverages, which were previously wrapped up into a whole account, or composites, started to fall away, certainly at the bottom or the lower end of program. So, principally around political violence or aviation war, or Avian 52, became much more pillared in its approach than it has been in the past.
And this year, the focus was much more on coverage than on price. And there was very little consistency right up to the end of December, which in reinsurers there were multiple Russia, Ukraine, Belarus exclusion clauses, multiple event definitions from different leading reinsurers. So consistency, which is what we like as a broker, so we can provide advice to the client, was much more difficult to obtain. So it's been interesting to see which reinsurers sort of strive to provide the best coverage or be more flexible towards their clients and those who were perhaps showing them less of an inflexible or more of an inflexible position. And that made it very hard for us to get them over the line.
CT: The chief problem was that while it was clear that reinsurers were aligned in their desire to tighten up the coverage they wanted to provide, they all had a different approach in how they wanted to do that.
NC: We did a spreadsheet halfway through December. And I think we had 12 different event definitions and different coverages for war on land and SRCC and terrorism, so in essence it became very mixed up, very difficult to get consistency. And when you're trying to place $300mn- $400 million programmes you need — it's quite a long walk around the market still — consistency a) to provide the advice to the client, so the team can provide advice to what the direct underwriter can start doing because by the way, it's quite a busy time for them as well. And also b) what we can provide in terms of reinsurance coverage, was a very long winded process.
CT: Understanding the mindset of reinsurers and their investors is key to understanding why the renewal played out in the way it did in December 2022. What transformed what had been a gradually hardening market into a hard market turn in the final weeks of the year was a realisation that for years reinsurers' had seen their portfolios underperform against expectations. Here's James Vickers again:
JV: The issue I think, is very much more around performance that the reinsurers have not been earning their average weighted cost to capital. Inflation has reared its head, with all the multifaceted aspects it has, on insurers' and reinsurance companies' balance sheets. Interest rates have gone up dramatically, which has an impact on the balance sheets with the lower mark to market value of fixed investments, but equally has an inflationary effect on claims. But then, on the other hand, has an increased discount on reserving. So, there are many complex factors coming together. But the reality was that the reinsurers have not been earning enough money. And particularly, I think in the property side, I think if we look at long tail business, particularly U.S. casualty business, the primary markets over the last three, four years have done an awful lot of heavy lifting. They've improved the terms and conditions and the pricing, and it was noticeable that the casualty renewals were calmer. The problem was really on the property side where the whole issue of attritional losses may be driven by climate change. Retentions being too low, reinsurance feeling that they were taking too much of the volatility of the primary companies has all come to a head and required a repricing.
CT: Nick Forti, Head of Global Clients, also picked up on the theme of investors' appetites and the need for reinsurers to start demonstrating profitability after years of underperformance.
NF: When I joined the market, it was just after 9/11. And it felt very panicky, back then, obviously, there was a question of solvency, around the number of players in the industry. Then you had Katrina, Rita Wilma, and that felt again, different. It was very much a sort of a property cat shock, and capital was being sort of raised at a very fast pace. So this one is unique. In so far, I think for the first time it has been really about the market psyche, rather than an outsized loss. Much has been said about Ian itself. I don't think that was the major factor. I think it's more of a market psyche change in terms of reinsurers freely admitting they've not been earning their cost of capital for a number of years. And to my mind, and this is very much a personal reflection, but it felt like this hard market was driven by investors, more than anything else. It's less about a decision made by the underwriters and more investors saying, well unless my cost of capital is returned to me, I would just shift out of reinsurance and into insurance. So very different dynamics, which I think led to a market that was driven less by a lack of capacity, and more by sort of a fairly sort of sophisticated financial view where you can get the best returns.
When there's capital destruction as a result of an event, that's not necessarily a particularly big issue for our industry, it means that other people will step in and replenish that capital and train leverage — that, the hard market. I think, like never before, the industry is facing a certain loss of confidence in some of the pricing models. And I'm not just talking about cat and secondary perils, and all the well-known issues. But you look at sort of some of the other classes, where aggregation and issues and you look at sort of Ukraine and cyber, there's lots of questions out there. And I think as an industry, I think the investors are asking us to come up with a credible answer, before really replenishing what capital has been either depleted by sort of losses, bolstered by the investment environment that we've been facing over the past sort of 12 months.
CT: That's all we've got time for in this first episode, but be sure to return for part two, where we discuss the role of the reinsurance broker in the first hard market for a generation, and how by being better connected, more collaborative and more innovative, our brokers were able to produce the most optimal outcomes for our clients.