1/1 renewals predictions versus reality: five things we’ve learned

From summer 2022 onwards, there were calls for renewal talks to start as early as possible as challenging market conditions piled up. From the global COVID-19 pandemic to increased nat cat activity, the war in Ukraine and Hurricane Ian in September, it was clear the 1/1 2023 renewals were going to be tricky. But did warnings about capacity shortages and retention hikes come to fruition? Were the negotiating parties happy with the positions they achieved when the music stopped?

An Intelligent Insurer panel gauged the post-renewals temperature. The panellists were: Mike Van Slooten, head of business intelligence of Aon Reinsurance Solutions; Johannes Martin Hartmann, chairman and chief executive officer of VIG Re; Javier San Basilio, deputy general manager and chief underwriting officer of Mapfre Re; and Catherine Thomas, senior director, analytics, at AM Best, who highlighted five takeaways

1. Pressure from the off

“It’s a pretty unbelievable sequence of events that’s brought us to this point,” said Van Slooten when asked about the conditions for the 1/1 2023 renewals.

A global pandemic, a war in Europe and rocketing inflation were just a few of the primers affecting the re/insurance market.

San Basilio pointed to the cumulative effect of five years of underperformance across the industry, a very volatile macro-outlook—with inflation “over the roof compared with the previous decades”, interest rate movements, the war in Ukraine, and severe loss activity in some of the European jurisdictions, particularly in France, finally topped off with the US cat losses as a result of Hurricane Ian.

“It was, for the lack of a better saying, the perfect storm,” he said.

Van Slooten said the biggest pressure his colleagues faced as they began renewal talks was to kickstart the quoting process, so Aon spent a lot of time front-loading its effort with buyers and tackling the hot topics of inflation and secondary perils.

A lot of early work was done to position buyers for the renewals in an attempt to get programmes into the market early, but in many cases reinsurers weren’t able to respond mainly because of difficulties in the retro market, so that delay was difficult, he explained.

When the negotiators got into the quoting process, reinsurers were coming in with a long list of conditions or subjectivities, which were never consistent. Working through those different requirements and trying to drive as much consistency across programmes as possible was challenging, he said.

2. Capacity shortage?

The supply of fresh capital was down overall, the panellists said, so did warnings about a shortage of capacity come true?

The very poor performance of the industry as a whole in the past few years has acted as a deterrent to fresh capital entering the market, and galloping inflation exacerbated the issue, according to Hartmann and San Basilio, who both flagged these issues when talking about capacity.

But, Hartmann said, “capacity was only a matter of price”, adding, “there was enough capacity”. “It was extremely difficult to buy horizontal covers and any kind of aggregates or proportional covers as these areas were under a lot of pressure. In these particular areas it was a very different game from the last few years when there was ample capacity for even these kinds of structures,” he said.

San Basilio said the excess of capacity that had been seen in previous years was certainly absent in 2022, but for him there was “at least sufficient capacity” during the 1/1 talks.

3. Rising retentions

The hard market pushed retention prices up, although Hartmann said his firm had managed to remain risk-adjusted to more or less the same structure on some parts of the business. “Retention increased, but it was more or less driven by inflation or by aggregates,” he explained.

VIG Re had to revise its 1/1 plans twice from its original strategy confirmed in April/May 2022. This affected the reinsurer’s incoming business and outgoing reinsurance as they expected prices to increase more dramatically, especially for property-cat, while also thinking about the target structure and retentions.

Events such as the hailstorms in France and floods in Germany in previous years impacted markets that had been very resilient in the past. As a result, there were “significant adjustments” to those markets.

“So in the end, there was much more to pay for the reinsurance buyers, much higher retention than planned,” Hartmann said.

4. Capital restrictions

Rate increases and appetite weren’t driven by a lack of capital, according to Thomas. She said that most of the global reinsurers her analysts look at “remain well capitalised” despite some of the unrealised investment losses that were seen in 2022.

“But that available capital isn’t necessarily translating automatically into dedicated capital to reinsurance. Despite available capital remaining plentiful, we’re seeing that it hasn’t led to a lack of underwriting discipline from reinsurers. Instead, reinsurers have responded to years of heightened losses, particularly in respect to property-cat risk, by becoming increasingly cautious as to how they’re deploying that capital,” she said.

Thomas added that restrictions in allocated capital have been driven more by sustained technical underperformance and claims volatility, and internal and shareholder pressure to respond to that, rather than actually reduced reported surpluses.

“We’re seeing rate increases and tightening in terms of conditions across all lines, but it has been most pronounced in property-cat, in those areas of increased volatility and uncertainty.

“The effects of inflation are clearly relevant. Also, climate risk trends and the recent geopolitical tensions are all having an impact on reinsurance risk appetite.

“The renewal was perhaps used by reinsurers to give a message to some of their cedants about where they thought adjustments were required on primary portfolios.”

Property-cat is therefore an area where insurers have been able to offer competitive terms on the back of historically plentiful reinsurance capacity, Thomas added.

5. Outcomes in a ‘perfect storm’

In spite of major trials and tribulations, many in the industry did get an outcome they were satisfied with.

However, Hartmann said, while the majority of the market achieved renewal goals to an extent, some programmes closed “very late and sometimes after Christmas”. “There are some shortfalls still going on—not everything is closed,” he added.

He emphasised that the market is still intact, and clients got cover, although at a higher price and not always on the terms they wanted.

San Basilio said that while Mapfre Re’s main focus was to provide a service to its clients, the company also needed to improve margins to better serve its capital, so the company needed to avoid excess volatility.

“We were very worried about the increase in frequency of medium-size losses, which had not been not properly modelled, nor properly paid, nor properly rated. It was a very challenging renewal, but I think we provided a fairly good outcome at the end.”

Van Slooten acknowledged market commentary about how late this renewal process was and said that the quoting process in particular was very late. He pointed to uncertainties in the retro market, caused in part by Hurricane Ian, as one reason for that.

“This sort of highly compressed timeline wasn’t ideal and I’m not sure it serves anybody,” he said.

He said there had been “intense pressure” in the final week of the year and “a hell of a lot of work needed to be done to get everything turned around”.

“There were a lot of reinsurers—we’re talking about a wholesale shift—looking towards named peril coverage ahead of the renewals. That was resisted, in many cases. Perhaps not so much on top layers where it’s the big perils that tend to drive the losses, but on the whole, that was resisted quite broadly. So that was a positive for buyers.”

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