Trapped collateral and a global retro freeze will further exacerbate supply demand imbalances at 1/1
The continued scarcity of retrocessional capacity will influence pricing and placements at the 1 January renewals. This is according to Tom Orton, property reinsurance underwriter at Ariel Re and Giovanni Maccioni, vice president, property reinsurance, Ariel Re.
”If you are a reinsurer looking to maintain your solvency capital ratio, you either need to supply additional capacity or purchase more retro or you have to pull back on your inwards,” said Orton. “So I think we’re going to see further retreats following Hurricane Ian on that basis as well, and that’s going to be on a worldwide basis.”
“Baden Baden is going to be the first time that message is being heard by clients and brokers.”
“In the softer market days, the retention points were brought down and down and down due to the availability of the retro. Now the retro market has to a large degree frozen up, because of Hurricane Ian, you’re going to see a rather material movement away from those lower attritional layers,” added Orton.
Speaking to Global Reinsurance ahead of the industry’s renewal discussion gathering in Baden Baden, Orton and Maccioni said the macro-economic environment, impact of Hurricane Ian and shortage of capacity would mean rates on line will inevitably rise at the upcoming renewal. At the same time, demand for cover is going up.
While these headwinds are most pronounced in the US market, they are being keenly felt in Europe, a market which traditionally has been slower to react to global events.
Pressure on brokers
Maccioni thought the onus would be on brokers to adequately prepare their clients for a challenging renewal, especially as many have not experienced hard market conditions before in their careers.
“Last year we had a big German loss in Bernd, but our understanding is it’s going to be an even more challenging renewal season this year,” he said. “Brokers will have to manage their clients’ expectations and manage their relationships with the reinsurance companies.”
“We are already seeing retentions going up,” he added. “Cedants are making huge efforts around inflation and providing transparency around their assumptions on how inflation is affecting their book.”
“We’re seeing a lot of cedants wanting to buy more - and new capacity has to come from somewhere - so they have to provide prices that are high enough to attract new capital.”
There is broad consensus Europe will not experience the same level of distress that was witnessed in Florida at mid-year, where some cedants struggled to secure the capacity they needed.
Fight for capacity
Nevertheless, reinsurance buyers will be fighting for capital and capacity at 1/1, thought Orton.
“There is going to be material increased demand for capacity, which could increase by as much as 10% in the US,” he said. “If you look at the supply side, with waning investor appetite, certain reinsurers retrenching or pulling back, and potential collateral issues relating to Hurricane Ian, there is a significant imbalance.”
“I’m not sure if the brokers have adequately prepared clients for it.”
“In the US, in particular, there is a relatively restricted amount of capacity out there and I don’t see that increasing,” he added.
This could result in the development of new reinsurance structures involving much greater elements of risk sharing between cedant and reinsurer.
“The European market always seems to move last, so it will be fascinating to see this renewal play out,” said Orton. “I don’t know how prepared cedants and brokers are, but in terms of the extent and the length of the softer market in Europe, there are a lot of brokers out there who haven’t had the experience of preparing their clients for what may be coming at 1/1.”
Pricing for uncertainty
In markets where rates-on-line have been on the low side, cedants must be prepared to price for the uncertain risk landscape and potential loss severity.
“Cedants often focus on expected loss but they forget about the uncertainty, which is huge and where the potential downside is quite big for an upside which is relatively small,” said Maccioni. “For us, it’s about trying to ensure there is sufficient upside to deal with the uncertainty.”
“One of the things we’re going to be focused on at the upcoming renewals is that clarity of coverage,” added Orton, “making sure we fully understand all the perils they are pricing for.”
“With higher inflation, for instance, you tend to see increased likelihood of strikes, riots and civil commotion (SRCC) and that’s one of the things we’re also going to be looking at, how to price that into coverages where those perils are afforded.”
Baden Baden: Cedants must dramatically increase retentions
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Baden Baden: Expect further retrenchments post Ian - Ariel Re