In the fourth episode of Gallagher Re's post-renewals podcast, host Charlie Thomas continues investigating the April renewals and what difference brokers made in finding solutions for their clients.
Among the issues facing cedants were the continued natural catastrophe (nat cat) challenge in Japan and beyond, finding capacity for contagious disease coverage in the wake of COVID-19 and navigating the impact of Five Powers Clause wordings. The podcast features David Bangs, head of Gallagher Re APAC UK; Nick Croxford, head of Gallagher Re Marine and Energy; Travis Noguchi, CEO, Gallagher Re Japan; Robin Swindell, executive officer, Gallagher Re Japan; and Will Thompson, Gallagher Re head of non-marine treaty for UK and Ireland.
Charlie Thomas: Hello and welcome to the fourth 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, we considered some of the market dynamics at play in the run-up to this April's recent renewals and explored the specifics of the Japanese renewal season that make it so unique.
In this episode, following on from our previous discussion around some of the headwinds that were present at 1.4, we look at the particular market concerns around natural catastrophe coverage, as well as exploring how Gallagher Re, as the reinsurance broker, made the difference at this fascinating set of renewals.
Regular readers of our 1st View reports will hopefully by now have caught up with the headlines from this April's renewals. For those in need of a reminder, early suggestions of capacity shortages in Japanese property catastrophe turned out to be unfounded, with demand and supply remaining broadly balanced.
Early quotations were notably wide in their range, with something of a two-speed market developing, whereby expiring capacity was offered renewals for reasonable rates, while new capacity attracted more opportunistic quotes.
When looking specifically at nat cat perils, earthquake coverage generally remained more sought after than others, both on an excess of loss and a pro rata basis, while earthquake-only layers tended to attach higher and have been subject to tougher minimum rate on line requirements from reinsurers.
And when it comes to coverage of other perils, the picture becomes more complicated.
Here's Will Thompson, head of non-marine treaty for UK and Ireland:
Will Thompson: 2018, 2019 was a difficult 24 months, from a typhoon perspective. There were four typhoons of quite meaningful size that affected Japan and caused some significant reinsurance loss activity.
As a result of that we had several years of meaningful price correction. And therefore the, let's say, technical adequacy of the Japanese market was perhaps higher than a number of other geographies that renewed at 1.1 or 1.4.
CT: Head of APAC UK, David Bangs, added that in recent years, the most significant change for the major nonlife companies has been the separating out of the earthquake and windstorm exposures from the previously consolidated cat pillars.
That dynamic has been well established for some time now, although there are examples of major cedants that continue to buy fully international global programs on the cat side, which include more complex elements, such as significant peak exposure from the US. He also noted a continued need to incorporate essentially global coverage across multi-lines of business on the per-risk side.
David Bangs: While we talked about the split of earthquake and wind, when we talk about the wind pillars in Japan on the domestic piece, they very much dominate the purchase for the non-life companies. The mutuals have probably more earthquake standalone exposure, which affects that dynamic to a certain extent as well.
Reinsurers have generally sought out standalone quake exposure, so that's made the mutuals historically a reasonably attractive proposition for reinsurers. But when we look at the wind, we do see that as broadly an all-risks cover, albeit excluding earthquake, and so we did see a little bit of pressure from the market to try to isolate Named Perils under the wind. However, I would say that we didn't really see any success from the reinsurers in that regard.
And then otherwise, I think outside of Japan, in Southeast Asia, for example, we still see a lot of whole account type programs. I think they did come under greater pressure. But really the only area where we saw for example, risk and cat split out explicitly was under some of the regional retro deals where reinsurers had drawn a fairly firm line in the sand.
CT: Here's Will Thompson again:
WT: We definitely saw earthquake being a preferred peril for many reinsurers. Whereas with wind, typhoon, particularly around perhaps the lower end of the cat programs, there was, just like 1.1, a push from some reinsurers to move up the tower a little bit or push those attachment points up, reflecting what they see as concerns around some of the secondary perils that could affect the bottom of the cat program.
We didn't see a change on the cat XLs. But there was ongoing pressure on aggregate XLs. A number of the Japanese clients are still able to place aggregate XLs. But they were certainly a more challenged placement with a greater capacity constraint than the near currents XLs.
CT: I was keen to understand whether climate change and its impact on nat cat events was being considered by reinsurers or cedants at this year's renewals. And when talking with David about the topic, it became clear that while climate change remains at the forefront of a lot of reinsurers' minds, there was little in the way of technical discussions around what, for example, the switch from La Niña to El Niño would mean for Japanese windstorms going forward. Here's David again.
DB: We've been pretty active, outside of renewal, in sharing our view of risk with reinsurers in the market. And a lot of reinsurers will have their own view as well. Naturally, the conclusions around both the near- and medium-term impacts of climate change still remain unclear...
...It's more about the Japanese have generally been pretty proactive in terms of how they've responded to market conditions and model change, perceived increase in cat risk, for example. So, I think there is definitely a view that over the long term, the increased impact of climate change is likely to be felt...
...Obviously, it's something that people are looking at pretty carefully. But the reality is that the Japanese cedants are very well-capitalized and prepared to adapt both in terms of the original underwriting and to the reinsurance purchase around developments on that side of things. And obviously, those reinsurers who might have expressed more concern around their perception of the adequate pricing, we did see some retrenchment to some extent, to perhaps cater for that. But as I say, I think ultimately, the key push from reinsurers was driven by cost of capital arguments.
CT: Now it's time for my favorite part of the podcast, which is where I ask our participants to help me and our listeners understand how we, as the broker, made the difference at these renewals. As many of our more experienced listeners will appreciate, while all renewals are conducted with the utmost discretion, this is even more so the case when it comes to Japanese cedants and their markets. As such, we're not able to go into too many specifics here, but I think you'll get a decent flavor of the hard work that went on behind closed doors in the run up to 1.4 this year.
Up first is Robin Swindell, Executive Officer for Gallagher Re Japan. Remember how in our last episode we discussed the issues which arose from COVID-19-related losses at the back end of 2022? Robin deftly explains here how sometimes, having an intermediary acting on your behalf can result in a better outcome than going direct to market.
Robin Swindell: Following the renewal we are very bullish on the role of brokers in Japan. The largest global reinsurers have strong and often direct participations in the Japanese market. And they all played hardball on pricing, terms and conditions of first of April.
Most of them walked away from giving contagious disease coverage for personal accident business. And I'm very proud to say that as brokers were able to step in and make a new market for our clients providing alternative covers. And I think this highlights that brokers have a key role to play in a hardening market.
CT: Travis Noguchi, CEO of Gallagher Re Japan, agreed.
Travid Noguchi: The role of the broker is quite important. The largest global reinsurers have a strong relationship, a direct relationship with Japanese clients in Japan. And they were sometimes coming with a strong stance to control the market. And some also had wider price and also coverage gaps that had to be managed. One example is a contagious disease coverage.
And overall, the brokers' role was to facilitate this relationship. But at the same time when there's a gap, we were able to make markets and create a solution for the clients. Both. that the clients were able to look for their coverage that they need, at the same time, there were markets that were able to step in to expand their relationship and circumstances.
CT: For Will Thompson, reinsurance brokers played a pivotal role in helping reinsurers understand the efforts cedants had gone to to mitigate the risk.
WT: If we had to look at one line of business, to highlight the role that the broker played, that would be on the per risk, where there was, as I mentioned earlier, some quite challenged performance on the large commercial industrial risk. It had, for a period of 10 or so years, given little by way of return to reinsurers.
And it wasn't just a question of communicating the reinsurance structures — it was helping the client and the reinsurers understand all of the changes that were taking place on the front end in terms of how the business was being underwritten, the governance structures around the writing of that sort of portfolio, and then the sort of reinsurance structures.
CT: For David Bangs, this renewal, more than any other he had been involved in, was a real test of brokers' mettle, both in terms of technical expertise, market influence, and in the relationship with the clients. Whilst efforts had been made to manage expectations on all sides, some of the initial round of quotes came in at the upper end of ranges that brokers had guided to, which took some cedants by surprise.
DB: In the end, I think we got it right. And the pricing ultimately came in around the midpoint of most of our ranges.
So I think where we really added value was helping them manage expectations internally. But obviously, as well, going to reinsurers with some pretty firm and robust arguments. That plus 35, plus 40, just didn't — just wasn't justifiable in this market, based on where the Japanese are coming from. So, on the one hand, we had that sort of price mitigation, which I think we did a pretty good job on.
The other side is obviously bringing together that holistic, group-wide view of the clients' exposures treaty by treaty, and, in some instances, being able to package that up in terms of the discussions with the more strategic reinsurers.
I'd say this year, we were more successful than we've ever been, in terms of coming to clients with package approaches from a number of reinsurers who'd been a little underweight thus far, so introducing, not new capacity, but new capacity to the Japanese, where we're able to find pricing that met reinsurer expectations, and meant that they were able to leverage that to some degree with supporting some of the more challenging placements.
If we step away from the property a little bit, looking at the casualty and the PA, with some pretty complex issues going on around loss developments, and reinsurers' response to that, we've had some fairly robust discussions around the claims piece in particular, that have ultimately led to the smooth renewal for our clients.
All of that is stuff that should be our bread and butter, but I think we were just tested more than ever in this market. And so many multiple factors coming together at once meant we really had to work efficiently across our various offices, across time zones, sharing market intel, and just being really clear and transparent with cedants, and also collaborative to a degree, but also quite robust with the market as well.
CT: Our final thought goes to Nick Croxford, Head of Marine and Energy at Gallagher Re. Listeners may be familiar with the so-called Five Powers clause, which excludes liability for losses arising from the outbreak of war between any of the following five nations: the UK, US, France, Russia and China.
In January, a number of reports appeared in the press, saying that cargo underwriters in the reinsurance market were increasingly pushing for this clause to be inserted at the 1.1 renewals as part of a widespread move to de-risk portfolios. In response, some primary markets felt they had no choice but to follow suit and add similar clauses to their wordings.
Nick picks up the thread:
Nick Croxford: Some of the five powers, you know, there's been a lot of focus on the Five Powers clause especially in the cargo market, again, principally driven by the by the conflict in Ukraine, that has become a focus for insurer and reinsurer alike. And so getting your client base through that requires significant thought and strategy and early engagement with the reinsurance market, which is something we planned when we first saw this happening in a way back in November/December.
So, we have been working on a solution for a number of our clients so that they are able to deal with the issue, or the request to include some form of Five Power clause into both insurance and reinsurance contracts.
I think, the key takeaway from moving into a hard market is strategy. Being prepared, sitting down, having a plan A, but knowing that if plan A doesn't work, making sure you got plan B, if Plan B doesn't work, you've also got a plan C.
It involves bringing alternative capacity, it involves bringing alternative structures, it involves hiving off certain exposures into markets with appetite for that, it involves a combination of proportional reinsurance and excess of loss.
What we've noticed is reinsurers have increasingly got differing sweet spots — some are looking for vanilla marine, some are looking for the more sort of esoteric type of risk — and so it's trying to mix and match or put the exposure into the right box rather than, in a more, in an easier or softer market you can force people to take a bit of everything, even if they don't really want it so, it's been it's been definitely forewarned is forearmed.
In a soft market, it's easy for brokers to become a little bit lethargic, and a little bit arrogant about what they are doing.
And I think it's really turned the clock back into understanding and having conversations with your reinsurance partners, in which we got many important ones, and finding out what they want, and what they don't want. And then sitting down with your client base and going look, you've got good relationships with five or six of these guys. But we need to think about where we're going to get them to work on your program.
And so that's really sort of creating a jigsaw puzzle effect. But by having the carrier management understanding and a good two-way dialogue, I think we've managed to produce solutions that work for both clients and reinsurer.
CT: That's all we've got time for in this episode. We'll be back in the summer, when we'll bring you our take on the all-important 1.7 renewals. Until then, don't forget to subscribe, as we're now available on Spotify, Apple Podcasts and all other good podcast platforms. Thanks for listening!