In this episode, host Charlie Thomas investigates the April renewals, including why cedant and reinsurer expectations were better aligned than at 1.1, the differing dynamics at play in what is a Japan-dominated set of negotiations and why the normally benign personal accident class presented carriers with a tricky challenge in 2023.
Charlie Thomas: Hello and welcome to the third episode in Gallagher Re's post-renewals podcast series, where we go beyond the headlines of rate movements, T & C tussles and retention levels and investigate some of the reasons as to why the renewal played out in the manner it did, what lessons can be learned, and the difference that the reinsurance broker made for their clients.
In our last episode, way back in February, we considered the challenge presented to brokers, cedants and reinsurers during the global renewal window in January. In this episode, we turn our attention to the 1.4 renewals.
As listeners may have seen in our recent Gallagher Re 1st View: Undimmed Resolve report, the discipline on display at 1.1 continued into April, but this time we saw a greater determination that pricing and contract improvements should be applied across all territories, and to all business lines.
For Japanese buyers, both client and reinsurer expectations were better aligned than in January, which led to a more orderly renewal process. This was aided by both the long-term nature of reinsurer relationships in the Japanese market, and the considerable improvements in primary underwriting that Japanese insurers have achieved in recent years.
In line with what we saw at 1.1, long tail classes largely experienced a calm, logical renewal, although there were a few pockets of contention, as we will hear later on.
The overall market supply/demand dynamic remained delicately poised with sufficient capacity available at April 1 to meet clients' needs.
However, given that the largest capacity requirement in this renewal remains Japan — which represents a significantly lower than peak US cat exposure demand — the renewal provides little in the way of a read-across for future renewal cycles.
Let's start with a focus on Japan, and bring in Robin Swindell, Executive Officer for Gallagher Re in Japan, with his opening remarks.
Robin Swindell: So from our perspective, the first-of-April Japan Property and Casualty renewals were very different from those we saw at the first of January in other parts of the world.
Japan has seen several years of quite significant and cumulative rate increases, both in the reinsurance rates but also the underlying insurance rates in the market, following the loss events seen in 2018 and 2019.
So in essence, reinsurers were correcting for their cost of capital requirements, but they weren't seeking some of the large technical corrections we saw in other parts of the world at first of January.
CT: Gallagher Re's Head of APAC UK David Bangs picked up the thread, noting that recent loss history from the typhoons Jebi, Tramie, Faxai and Hagibis were still part of the dynamic at play during this renewal season.
David Bangs: So I think the Japanese cedants would consider themselves coming ay this particular renewal in a position of continued payback to reinsurers. And while there was certainly no expectation of rates reducing anytime soon, there probably was an expectation that rate increases would not be as significant as the, you know, 40 to 50% in some areas that we saw at 1.1...
And Japan, we feel has probably paid somewhere in the region of around 70% rate increases over the last three to four years. Albeit driven by loss experience, but that's taken pricing to certainly close to an all-time high for on the cat side.
So against that backdrop, we were very quick to impress on the reinsurers the need to take a more measured approach. And I think ultimately now the dust has settled, cedants will be broadly satisfied with the increases that they saw somewhat mitigated while reinsurers perhaps were satisfied, but obviously, perhaps would have wanted more, based on where they started after the first of January.
CT: I really enjoyed Will Thompson's characterisation of the April renewals, which he described as a score draw, with both reinsurers and clients coming out of the renewal broadly satisfied, given the backdrop of the market.
The Head of Non-Marine Treaty for UK and Ireland went on to add that while pricing still moved materially, the movements were less noticeable than at 1.1 for a whole host of Japan-specific reasons.
Will Thompson: I think we all learned an awful lot, being able to look at how the first of January renewals unfolded, to identify just where the reinsurance market was, or is, from a pricing perspective, we got good insight into some of the thematics around coverage. And also, unlike the 1.1 renewal season, the retro was not really a consideration. Reinsurers had, largely put in place all of their sort of retro capacity for the year. So whereas that was sort of unfolding real time during sort of first of January and influencing some reinsurance appetite, that was a known dynamic for first of April.
CT: In Marine and Energy, deals got home in good time — particularly when compared with the 1.1 renewal. While retro remained difficult, most April Marine and Energy reinsurance treaties benefited from having already factored in the Russia-Ukraine challenge at the previous renewal, given the conflict had initiated back in February 2022.
Here's Nick Croxford, Head of Marine and Energy at Gallagher Re:
Nick Croxford: The clients that renewed this April had dealt with a lot with the Russia-Ukraine language in 2022. So they were effectively not getting such a shock as those at the first of January. Most of the other lines of business, with the exception of retro, were — smooth would be the wrong word — but were not suffering the sort of the severe hard market that we're seeing in that in that space.
...You know, traditionally people have looked at what they've written in the first of January, and thereafter, and then built all their retro accordingly. What we're seeing this year is retro aggregate is very tight, especially around offshore platforms and blast zones in major conurbations. So that's getting increasingly difficult and increasingly hard to find capacity as we head through February, March and April.
CT: The Japanese market contains some of the largest per risk and catastrophe programs globally. And this means that a large panel of reinsurers is required to complete most placements. This makes it difficult for large buyers to be agile in negotiating their way around the market.
Added to this was a number of additional headwinds for cedants in the run up to the 1.4 renewals. Alongside the Covid-19 personal accident losses which emerged in the third and fourth quarter of 2022, we also witnessed some high-profile losses from Japanese companies underwriting business outside of Japan.
Here's David Bangs again:
DB: The other, quite significant dynamic that impacted this renewal was coming off some pretty meaningful losses into the market from the JIA. That's Japan Interest Abroad business under their per risk programs.
And that had further diminished the reinsurance position on the large surplus treaties that most Japanese cedants buy. These treaties are integral to supporting primary underwriting, large limits, and indeed, reasonably significant cat coverage included within there. And most of those are both domestic and overseas to support the underwriting across various territories.
So with the significant loss, probably the first major overseas loss since the Thailand floods in 2011, I guess that really just sharpened reinsurers resolve to focus on that overseas exposure in particular, and obviously, the cat as a key component of that...
And then finally, perhaps one of the most complex dynamics was around the personal accident business, where over the summer, the Seventh Wave of Covid had quite a significant impact on the Japanese market and, put most of those treaties into a loss position...
CT: Will Thompson also referenced those notable personal accident losses, not least because the line had had a relatively benign run for the past 10 years.
WT: I'd say the one line of business that has been quiet for many years, maybe a decade plus, is personal accident. And perhaps a unique feature of the Japanese market was that in 2022, most of the non-life companies experienced loss activity under the PA policies, and that caused some reasonably sizable reinsurance losses.
And as a result of that, we had a very interesting but complex challenge to solve for, around the coverage for communicable disease, under those PA programs. And I think the PA programs were probably the latest to conclude — it was really only in the final week of renewal that we sort of unblocked that issue and got those placements home.
CT: However, despite these headwinds, the Japanese reinsurance market continued to show stability, thanks to a very mature interaction between reinsurers and their clients, as Travis Noguchi, CEO for Gallagher Re Japan, explains:
TN: There are several backgrounds to this. I think the clients benefit from the several years of committed rate increases that made it payback and also reinsurers have had opportunity to correct cost of capital needs in the past years. And also from learning from 1.1, the clients were very equipped on what might happen and also there is uncertainty around the regional market renewals, which benefit the one for renewals. Under that circumstance, the additional capacity purchased in other territories was driven by inflation, which in Japan was not the case. And the clients manage the explanation to address how the economic situation is different from others.
And also, most importantly, Japanese market has a credit from longer-term relationships that has been built and brought more stable relationships to find an amicable solution.
CT: One major headwind for international renewals in January, which was far less of a concern for Japanese cedants, was that of inflation. While inflation levels in Western Economies remain eye-wateringly high, and the specter of social inflation continues to rear its head, in Japan, it's a very different scenario, as David Bangs explains:
DB: We were very quick, from an early stage to differentiate the Japanese position compared to some of the Western economies, particularly Europe, UK, US. We just think the dynamic was very, very different in Japan, that's a territory that's seen the same sort of deflationary environment for, you know, the last 10 years or more. So, in that sense, the relative change was always going to be, you know, reasonably marked, but we were really dealing with discussions around, certainly below 5%, you know, when we compare that to 14-15%, in Europe, so, from an early stage, we set out some fairly sort of robust justification around the general absence of labour inflation compared to Europe and elsewhere.
And certainly, the cedants were proactive in putting together some fairly detailed packages to explain that, based on both their primary underwriting and what they're seeing, how they factored inflation into their primary pricing already, and what that means for housing stock.
CT: That's all we've got time for in this episode, but be sure to return for part two, where we discuss natural catastrophe coverage in more detail, and outline the role of the reinsurance broker, and how by being better connected, more collaborative and more innovative, our brokers were able to produce the most optimal outcomes for our clients.
See you next time.