Hard talk: European renewals push through price increases

Better late than never, as the saying goes. European 1/1 renewals went to the wire for many this year with “protracted and late negotiations”, as Gallagher Re put it in its summary.

Dirk Spenner, the broker’s regional leader for EMEA North/East noted: “It was an unusually challenging renewal.” To explore those challenges and what it meant for reinsurers and cedants, he joined Intelligent Insurer, along with others: Catherine Thomas, senior director for analytics at AM Best; Yörn Tatge, senior vice president and managing director at AIR Worldwide; and Frederik Wulff, chief executive officer of Markel Insurance.

Pricing pressure

Much of the difficulty came down to pricing. “There was a clear drive for reinsurers to seek improved pricing terms,” explained Spenner. That’s not unusual for renewals, but this year’s approach was striking.

“There was a much stricter underwriting discipline driven from the C-suite,” he said. “Reinsurers have tried to adjust pricing in Europe in previous renewal cycles, but this time there was clear direction from the top: something needed to change, and it was noticeable that liberty was taken away from the front-end underwriting and put in a disciplined framework.”

Much of that was the result of nat cat losses—and was, as Tatge noted, hardly surprising in light of events in the summer of 2021.

“For property cat, the events that unfolded in June and July 2021 dominated discussions and probably also the renewals,” he said. Severe thunderstorms and, particularly, the floods in Germany and surrounding countries such as Austria, Belgium, and Switzerland have played a key role.

“It was the single most expensive event that Germany has seen, and the year altogether in 2021 was also the most expensive in aggregate, so it has been a very extreme event,” he said.

“One thing that was noticeable was a clear focus on secondary perils in Europe,” added Spenner.

Thomas agreed, saying: “We saw a continuation of the trend of reinsurers reducing their exposure to frequency events and aggregate covers—types of cover often for perils that are perhaps less well modelled.”

However, if recent losses were the catalyst for increased pricing, they did not come out of nowhere. They followed several years of margins eroded by the accumulation from mid-sized events, she said, and growing concern about the impacts of climate change.

“It was even overdue when you look at the models,” added Tatge. “All the signs point in the direction of more frequent events of this kind.”

Striking a balance: differing fortunes

For all that, however, deals were done. “It was a difficult and late renewal season, but programmes did get placed, and ultimately the renewals went largely as we expected,” said Thomas.

Wulff agreed. “I didn’t see many players getting rid of profitable books just to get slight rate increases through,” he said. “That didn’t happen.”

That’s partly because the industry remains well capitalised and capacity is plentiful. While there was not much new capacity in 2021, there was a “class of 2020”—some of which formed too late to participate much in the previous renewal.

“They clearly used 2021 to build out their infrastructure. We’ve seen them coming on board and being able to underwrite European business, so they provided some additional capacity to the marketplace,” said Spenner.

On the other hand, he added, there’s no comparison to previous cycles such as those following the 2001 World Trade Center attacks or Hurricane Katrina in 2005. “In those instances, a number of new carriers were formed that had a big impact on pricing.”

Thomas agreed: “We did see capital coming in in 2020, but concerns about the firming market being short-lived due to a very rapid expansion of capacity putting downward pressure on rates just didn’t materialise.

“The hard market is not being driven by a lack of capital; rather, it’s been driven by renewed underwriting discipline as reinsurers are seeking to address underperformance in the sector and looking to meet their cost of capital,” she added.

The result was, therefore, a varied picture. “It was a mixed market depending on where you were residing and whether you as a client had huge losses in 2021,” Spenner said.

On the property cat side—since this is the easiest to compare across markets—rate increases range from zero to 5 percent on a risk-adjusted basis, according to Spenner. In loss-impacted areas such as Austria, Belgium, Germany, and Switzerland the range was from 15 percent to 30 or 50 percent or even higher.

Harder to survive

Ultimately, however, the conversations across property and casualty were largely successful, which should be cause for optimism, said Wulff.

Europe has not had a hard market for a long time, he pointed out, and this year showed that market participants have now “learned to live with each other” in the new environment.

“If you look at the renewals one or two years ago, they were far more stressful for all parties involved given the fact that there was suddenly a hard market and there needed to be difficult discussions,” he said.

There are likely to be further difficult conversations ahead. Thomas said that the reinsurance industry has struggled for years to meet its cost for capital—probably about 10 percent, she estimates, while the sector has returned 4 percent on average over the five years to the end of 2020. With the losses in 2021, concerns over social inflation and the threat of climate, the need for underwriting discipline will persist.

“As a consequence, we expect hardening market conditions to continue at least through 2022,” she said.

“Reinsurers need to demonstrate that they can meet their cost of capital to remain relevant and survive.”