No catastrophe for casualty, but challenges remained at renewals

The big story for the renewals season in Europe was that it was late and hard. Much of that reflects the focus on natural catastrophes, with an emphasis on the impacts of climate change and the rise of secondary perils. More concretely, the July 2021 floods in Germany and surrounding countries stiffened reinsurers’ resolve to raise rates.

It also explains in part why negotiations continued so late, as Yörn Tatge, senior vice president and managing director at AIR Worldwide, revealed.

“For insurers, the Bernd storm event in Germany in July 2021 keeps unfolding. The original estimate was around €4 billion; now, we are talking about €9 billion,” he said.

“My expectation is that the number will increase further given that we have winter now and there are still lots of wet buildings and walls that will further increase the bill.”

For natural catastrophe risk the effects of rate rises varied significantly, according to Catherine Thomas, senior director for analytics at AM Best. And elsewhere, negotiations were still easier.

“The challenge of factoring into nat cat pricing the potential impact of changing climate trends has led reinsurers to materially reduce cover for that risk. In contrast, on the casualty renewals we saw a generally more stable picture,” said Thomas.

Tatge and Thomas were among those looking at the European renewals during a discussion with Intelligent Insurer. They were joined by two others: Dirk Spenner, regional leader for EMEA North/East at Gallagher Re; and Frederik Wulff, chief executive officer of Markel Insurance.

Wulff agreed that there was generally less of an impact outside property cat. Markel is mainly focused on directors and officers (D&O) liability, professional indemnity, financial lines and cyber. In many of those lines, hard negotiations in previous years had already smoothed the way for this year’s discussions.

“Given the last renewal seasons in the European markets and the areas that we are active in, there wasn’t much movement, to be honest,” Wulff said.

Talking terms

As ever, though, there are exceptions. For a start, as Wulff noted, there was still differing treatment. “Some players, especially in D&O in the larger business end, pushed a lot on rates—not as aggressively as they did last renewal, but there was still quite a bit of movement,” he recalled.

There were also “more dramatic movements” in the cyber market, again especially for larger risks, but also elsewhere. According to Wulff, in this space at least there were real shortages of capacity. “There was not enough for the risks that we’re looking for it,” he said. That meant broader rate increases, too.

“Aside from property cat, cyber was the area where we did see some real capacity constraints and material increases,” Thomas agreed. As with cat risks, that’s the result of accumulated smaller losses from issues such as ransomware, but also the fear of significant events from an evolving peril that is still not fully understood.

“Ransomware attacks are well documented as the principal driver of those losses. But the potential for catastrophic losses from that systemic line of business is also increasingly weighing on insurers and reinsurers when they make their assessment of their risk-adjusted rate adequacy,” she said.

More broadly, concerns about social inflation are felt across lines, she agreed.

It was not just rates that were under discussion. As Spenner explained, on property and nat cat lines there was little change in terms and conditions—partly because the necessary discussions had already occurred.

“Twelve months ago, we were talking about communicable disease and cyber exclusions. Quite frankly, from the summer of 2020 to the end of the year, that seemed to be the only subject,” he said.

By the renewals, however, it settled.

On some specialty lines, however, terms tightened significantly. “There were a lot of additional risk mitigation questions and a lot more information requests, especially on ransomware, so terms and conditions absolutely narrowed,” said Wulff.

In some cases this was the more difficult topic since coming price increases had been widely trailed. “It was probably more contentious than the rate because the issue with rates was already quite well known,” he said.

Whether it’s on pricing or terms, the increased scrutiny from reinsurers is likely to remain. It is, concluded Spenner, a “shifting market” with the emphasis firmly on risk selection, pricing and accumulation control. That means that, for those who escaped difficult discussions during these 1/1 renewals, challenges could still lie ahead.