Brokers fear being squeezed out of the loop: VIG Re

“I have never seen brokers so nervous. The tide has been turning for some time and it is increasingly difficult for them to talk a good story on price, especially on property. They are concerned they will not get deals done—and they will end up with holes in their clients’ coverage.”

Those are the words of Johannes Martin Hartmann (pictured), chairman of the board of directors, VIG Re. He said that brokers fear that, if deals do not get placed, they risk their clients offering rival brokers an opportunity—or even doing private deals directly with reinsurers themselves. Either way, brokers fear losing business and being left out.

“They are still able to advise on things like transparency and they will look to differentiate their clients, but their fear is getting squeezed out,” Hartmann said. “As a result, they are not pushing too much; they are trying to manage clients’ expectations. They are advising them: ‘don’t try and buy too much, be flexible, give in a little on price’. It is because they don’t want to look incompetent, and risk being replaced.”

For all the talk of a shortage of cat capacity, accentuated in the aftermath of Hurricane Ian, Hartmann believes that in Europe there is adequate capacity—available at the right price and using the right structure. “It is a question of price and structure, not capacity,” he said.

He acknowledges that, driven largely by inflation increasing asset values, European cedants will be seeking between €1.5 and €2.5 billion of additional reinsurance capacity this year. “That means a lot of treaties will be underquoted. But it will come down to things such as retentions, terms and conditions and wordings—as well as price.”

Up for renegotiation

Among the specific things Hartmann expects to be renegotiated are retentions, treaties that combine multiple perils and so-called “top and drop” contracts, whereby a reinsurer provides a clause to allow the reuse of the top excess-of-loss layer in the reinsurance tower if the retention of this top layer is not breached by the first loss event.

Such structures have become increasingly common in recent years but they need to be reviewed, he believes.

Event definitions in some contracts need to be reconsidered. He cited the instance where a number of severe convective storms in France hit one after another in late May and early June. Some contracts treated this as one event, others as multiple events.

He believes clauses covering sanctions and cyber risks need to be reviewed as does any ambiguity around losses triggered by war—for example, blackouts which ultimately result from conflict.

“All we want is certainty,” he said. “As we saw with COVID-19 and the way that was treated differently in contracts, it is so important to ensure transparency and certainty around what is covered.”

A 360-degree view

VIG Re was formed originally to optimise reinsurance buying for its parent Vienna Insurance Group, Austria’s largest insurance group, which has operations across Central and Eastern Europe (CEE). The reinsurer coordinates multiple reinsurance programmes for its parent, retaining some risk itself but also working with a multitude of regional and national reinsurers; it facilitates group treaties but has a right of refusal for local cessions.

In recent years, the reinsurer’s own book of third-party reinsurance business has grown quickly. In 2017 it formalised a strategy to expand—now, VIG Re has a strong foothold in CEE and has been steadily growing its position in continental Europe and Asia.

This duality of role, as a buyer and seller of reinsurance, means that Hartmann has a unique 360-degree perspective on the market. He is very aware of the fact that many other reinsurers are as yet unable or unwilling to offer certainty on how much capacity they can offer, especially for property-cat risks. He says this is often because they are waiting for clarity on capital they rely on themselves.

“The retro market is in a very extreme situation; it is very challenging,” he said. “There is a shortage of capacity and concerns around trapped capital are still there for some insurance-linked securities (ILS) investors.”

Hartmann foresees, where retro capacity is available, a gap emerging between the type of coverage reinsurers will offer and the type of retro they can buy. He believes most reinsurers will still offer all-risks coverage, whereas the retro markets will likely limit coverage to named perils. “There is a gap emerging,” he said.

But that gap needs to be priced into reinsurance contracts, as do inflation, economic uncertainty and many other things, he says. “It is certainly an interesting market. For us, there are two scenarios: if we do not see rate increases and improvements in terms, we may shrink our book; if those things happen, we could grow.

“We believe this is the time to get things right. But it will be a late renewal under either scenario.”

He has seen quotes in Baden-Baden this week, but they are not for cat business. He believes it will be the end of November before true clarity emerges in this space.

“We usually talk numbers in Baden-Baden; this year, it is much more high level,” he said. “People are still feeling their way; it is like a poker game.”