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1.1 RENEWALS REPORT 2021 ADGO.CO
2 1.1 RENEWALS REPORT
2021
TURNING
A CORNER
ADRIAN MORGAN Clearly, so many issues to address in what
GLOBAL HEAD OF has been one of the most intriguing treaty
ADVANTAGEGO renewal seasons of recent years, especially
given that it has to take place during a year
of pestilence, one in which we have sought
to continue to work around the considerable
hurdles of COVID-19. All this, of course, and
the impact of Blueprint Two; which has
continued to streamline the placement, tax
and accounting systems across the Lloyd’s
market as it seeks to reduce collective costs
There was a fair degree of hype in by some £800 million.
the run-up to this renewal – would we
finally see the price rises that hungry Thankfully, we are not alone in seeking
reinsurers had been longing for after to digest and interpret the vast array
years of relatively thin gruel? And if of information pertaining to the 2021 1.1
such rating increases were achieved, renewals. Indeed, there has been a wealth
of commentary and in-depth analysis from
would reinsurers actually be content
leading players in the market that we have
that they had achieved rate adequacy
sifted, churned and carefully distilled on
across their portfolios? What about the
your behalf so that you can absorb the
talk of exclusionary language, especially
main takeaways. So sit back, make yourself
around pandemic and contagious comfortable, and let AdvantageGo guide you
diseases wordings, which has been such through the key components of the latest
a contentious issue this past year? And reinsurance renewal season.
what of the other bugbears for the market
such as silent cyber? And exactly how
sustainable would any hardening be?
1.1 RENEWALS REPORT 3
2021
HARD
TIMES?
We were intrigued to see that (re) But first, some supply-side economics.
insurance broker Howden titled its excellent Traditionally, one of the most critical factors
commentary on the latest 1.1 treaty to influence the 1.1 renewals has been the
reinsurance renewals ‘Hard Times’, bringing availability of capital, with a more constrained
to mind the 1954 Dickens novel, which is a capital base often the precursor to a degree of
brilliant satire on Victorian utilitarianism. hardening. However, as recent renewal seasons
Readers familiar with the book will know its have indicated, to a certain extent capital
famous opening – ‘Now, what I want is facts!’ is no longer the over-arching determinant
– which seems apposite for such a detailed it once was – and the hard and fast fact of
commentary covering a range of technical readily available reinsurance capacity (or hard
renewals across the reinsurance spectrum. to find capital) can no longer be regarded as
However, one might be tempted to suggest, the most important factor going into renewal
with the greatest of respect, that a better discussions.
choice here would be Dickens’s ‘A Tale of Two
Cities’, with its even more famous beginning: After all, as Willis Re noted in its ‘First
View’ report, the global reinsurance capital
“It was the best of times, it was the worst of base rapidly recovered during 2020 from a
times, it was the age of wisdom, it was the age combination of improving investment markets,
of foolishness, it was the epoch of belief, it was retained earnings and new capital – ending up
the epoch of incredulity, it was the season of 3% higher than year-end 2019, giving buyers
light, it was the season of darkness, it was the hope that they would not be facing a truly hard
spring of hope, it was the winter of despair.” market, but more of a firming landscape.
Surely this could not have been more fitting Such a viewpoint was also reflected by AM
for the current reinsurance market, especially Best and Guy Carpenter, estimating that
with regard to European accounts, which traditional dedicated reinsurance capital for
dominate 1.1 renewals. For as Howden points year-end 2020 was $397 billion – a slight
out, the reinsurance market had to contend increase on year-end 2019 as favourable
with the COVID-19 pandemic, another valuations of assets, coupled with capital-
above- average loss year, lower yields and raising initiatives, saw capital levels recover
continuing climate change concerns. So, in from the decline witnessed at mid-year 2020
many senses the ‘worst of times.’ But equally, – with dedicated capital also benefiting from
as it points out, these factors coalesced new capital formations.
to bring about “some of the sharpest
price changes in recent memory” as rates Indeed, as Howden identified, balance
accelerated across most commercial lines in sheets remain generally strong, with the
2020 – despite businesses “facing significant, sector continuing to attract substantial new
even existential” financial pressures due to investment capital and reinsurers “mostly
COVID-19. Certainly, for many in the market, disciplined and discerning” at 1 January 2021
the best of times and the worst of times reinsurance renewals.
indeed.
4 1.1 RENEWALS REPORT
2021
Howden also supported the broader estimate “While there is no doubt that in 2020 the
of continuing plentiful global capital, reinsurance market was impacted on multiple
suggesting that insurance capital actually fronts by property losses, COVID-19 and
reached record levels in 2020, and is expected continuing strain in the casualty market, it
to remain broadly stable this year and ext is a credit to the financial robustness of our
when it should support strong premium marketplace that reinsurers were largely able
growth. to navigate through these challenges, respond
to changing conditions and define market
Indeed, as Guy Carpenter’s global head strategies for management and investors.”
of distribution Lara Mowery noted, the
reinsurance market has demonstrated a
remarkable degree of resilience this past year:
1.1 RENEWALS REPORT 5
2021
COVID
CONCERNS
Naturally, no discussion of these renewals Indeed, as Willis Re notes in its commentary
could fail to consider the pandemic that has on the 1.1s, a major concern for the market has
caused so many fatalities around the world been a lack of clarity around COVID-19 losses,
and fundamentally altered the way in which which were only advised late in the renewal
we live and work. As matters stand, of course, process or not advised at all under a growing
there remains considerable divergence as number of reinsurance programmes. Indeed, as
to what the ultimate losses to the market the broker rightly notes, the technical issues on
will be, and the difference in COVID-19 loss both primary policy coverage and reinsurance
projections is considerable. treaty wordings are complex and, in many
cases, still at early stages of deliberation:
Some have suggested, for example, that
COVID-insured losses could eventually “Sensibly rather than trying to solve complex
approach the largest loss ever for the issues under compressed renewal timelines,
commercial (re)insurance market, with those at most programmes renewed not considering
the lower end of the spectrum suggesting an any potential COVID-19 losses, leaving time for
event more akin to a moderate hurricane loss; more measured discussions to take place over
with a loss projection in the region of $30bn. the next 12 months and for negotiations to be
deferred to subsequent renewals.”
Clearly, the jury is still out. What is clear for
now, as Howden expressed, is that which Where reinsurers have been clear, according
scenario which most accurately depicts reality to the broker, is in their unwillingness to accept
will become evident this year. In the meantime, ongoing contagious disease exposures on
it adds, while capacity and risk appetite will be short tail lines except in limited and territory
shaped by the answer, (re)insurers are strongly specific cases, and this has led to the broad
positioned to trade through and, whatever the acceptance of some form of contagious
outcome, will benefit as COVID-19 uncertainty disease exclusion. For long tail lines, though,
recedes. it suggests that the outcome was much
more nuanced both by account and class of
Yet, as difficult as the current pandemic has business, with contagious disease exclusions
been for so many of us, to a large degree – less prevalent.
according to James Vickers, chair of Willis
Re International – the cost of COVID claims
was not really considered during this round of
treaty renewal negotiations, not least because
we are still waiting to hear the outcome of
several legal disputes in various jurisdictions
around the world.
6 1.1 RENEWALS REPORT
2021
BERMUDA’S
CLASS OF 2020
In the run-up to the renewal season, the “There have been 51 new insurer registrations
resilience of the Bermudian reinsurance in Bermuda this year through October, and the
market was singled out by PwC’s territory Class of 2020 is well on the way to establishing
and insurance leader Arthur Wightman, who itself – not something that people thought
pointed out that the territory had overseen we’d see again since 2005/2006. Bermuda has
the deployment of between $12 billion and shown once again that it is the place to deploy
$15 billion in new capital in recent months. capital efficiently and effectively and it is the
place to innovate.”
Big names in Bermuda attracting interest
in recent months with start-ups include “The value proposition of the island is
Hamilton; Compre; Canadian investment group sometimes called into question, however the
Brookfield; and Chaucer. capital markets tend to act as the ultimate
arbiter and the island continues to show its
“Bermuda is at the forefront of global capital resilience as well as its leadership position
raising in the reinsurance sector with estimates globally for reinsurance, ILS, life reinsurance
of approximately $12 to $15 billion of new and captives.”
capital being deployed into the sector in the
last several months,” said Wightman.
1.1 RENEWALS REPORT 7
2021
PROPERTY
EXPECTATIONS
On the property side of the fence, Lloyd’s As such, it said, terms by and large as a
and Bermuda-led carriers appeared more minimum stopped falling, upwards movement
principled on strict exclusions, frequently increasingly moderated through the renewal
resulting in reinsurer panels shifting towards season leaving firm order risk adjusted
Continental European based carriers, changes for loss free catastrophe programmes
according to Willis Re. on average below +5%. This needs to be
viewed against a backdrop of risk adjusted
Looking at European natural catastrophe average quotes of circa +10% and firm order
pricing, several factors coalesced to dampen monetary movements in excess of +5%.
initial reinsurer expectation of a significant
change in rates, it added: a balance of a Smaller and regional programmes fared
less-than-anticipated challenge to the retro better and closer to the lower end of the nat
market in both price and availability; a less cat pricing range (0% to +5%), according to
distressed ILS sector and increasing risk Willis Re, while larger and multi-territorial
appetite for European nat cat exposures programmes on average renewed with higher
fuelled by substantial (>$10bn) investments increases.
into existing and newly formed carriers, who
had formed relatively late in the renewal It added that it was no surprise to see
season and were not seen as a major influence reinsurers significantly differentiating their
on the overall pricing dynamic. client base, which meant for most loss-free
local programmes the renewal followed a
According to Willis Re, reinsurer-driven fairly normal process. However, a caveat here
aspirations around the virtual Monte Carlo and is that most COVID-19 impacted treaties
Baden-Baden conferences of +10% and more and otherwise challenged placements fared
risk adjusted increases on European nat cat comparatively worse with increases outside of
rates became unrealistic and those reinsurers the (0% to +5%) pricing range.
adjusting their pricing demands late, or not at
all, lost out on the overall improved economics
of European nat cat.
8 1.1 RENEWALS REPORT
2021
CORE
COVERS
Perhaps unsurprisingly, Willis Re noted One area of the property market that was
that aggregate and frequency catastrophe watched particularly closely was property
protections faced more severe pricing retrocession renewals, as some observers
pressures in line with the higher level of loss expected hardening market impacts to be
activity seen across Europe on these covers. significant, according to Guy Carpenter:
These covers, it stressed, remain core for
many buyers, which renewed with improved “However, rate movements on non-loss-
terms and revised structures in some cases. impacted programmes were not as robust as
many anticipated and continued to moderate
Guy Carpenter’s assessment of 1.1 property closer to January 1. Additional capacity in the
renewals also noted that, based on current retrocession market, lower limits bought by
market views, loss implications from COVID-19 some global companies and increased activity
were not as disruptive as feared earlier in the in the catastrophe bond market all helped to
year. It said pricing generally settled at the moderate some of the upward pressures in this
lower end of expected increases (outside of section of the market.”
more constrained segments), and that where
placements were loss-impacted, particularly An important takeaway from the broker was
in cases where retentions were perceived to that communicable disease exclusion wording
be too low, reinsurers held firmer on pricing was a key discussion area on every property
or structure adjustments. The company also renewal worldwide. Indeed, it suggested that
determined that a number of clear themes due to the potential global nature of this type
emerged with regard to property renewals. of loss and the possible broader financial
Ample capacity was available from incumbents market correlation, capital providers and
and new entrants to the property reinsurance investors stipulated exclusions in most cases:
market during the fourth quarter of 2020,
“Since mid-year 2020, as this issue was
while limit demand was generally stable with a
crystallising, there has been a substantial
few pockets of increases.
amount of focus across the industry on the
On non-loss impacted programmes, it added, best approach to satisfy the need for an
risk-adjusted pricing was up mid-single digits exclusion, while not eroding critical protection
to low teens in the United States; while in for covered perils.”
the EMEA and the Asia-Pacific regions, risk-
adjusted pricing increased by low single digits
on average. Meanwhile, known global large
losses in 2020 were higher than average,
excluding COVID-19, driven by frequency of
small and mid-sized events.
1.1 RENEWALS REPORT 9
2021
CASUALTY
SHIFT
Casualty reinsurance rates-on-line, including According to Guy Carpenter, global casualty
adjustments for exposure changes and renewal themes at 1.1 also included ample
ceding commissions, rose by 6% on average capacity available across most casualty
at 1 January 2021, according to Howden’s lines, while for some programmes with more
analysis, which pointed out that rising rates challenging loss experience or industry classes,
on underlying business, especially in the US, there was additional pressure on other treaty
mitigated pressure on ceding commissions terms/conditions and pricing.
somewhat, although outcomes varied
depending on book performance. An area of the casualty market that has
been something of an anomaly, however, has
The broker noted that reinsurers “were resolute been the financial lines segment – which has
in pursuing higher pricing for excess-of-loss demonstrated stable to improving terms due
programmes,” though with the proviso that to the strong underlying rate environment,
there was again some degree of differentiation as well as continued carrier underwriting
to account for portfolio characteristics and discipline.
profitability.
Elsewhere, it noted that cyber aggregate
Guy Carpenter agreed that casualty renewals capacity saw continued tightening, driving
varied widely, depending on individual increased pricing, while there was some new
circumstances including loss experience, or expanded client interest in casualty clash
covered lines and industry classes written: coverage.
“Every placement experienced some degree For casualty placements, Guy Carpenter’s
of continued reinsurance underwriting rigor analysis suggested that contract language
around stress factors broadly encompassed requirements around pandemic and
by social inflation, the low interest rate communicable disease varied by line of
environment and communicable disease.” business with workers compensation, long-
term care, casualty clash and casualty
programmes with particular exposures
requiring the most discussion.
10 1.1 RENEWALS REPORT
2021
US
THIRD-PARTY
Looking at the US general third-party liability Looking at professional liability Stateside,
market, Willis Re noted a continued firming Willis Re noted that capacity for quota share
of reinsurance pricing due to increased cost business has increased significantly since H1
of capital, prior year development, increasing given significant underlying rate increases,
loss trends and the COVID-19 environment. coupled with limit compression notably in
public D&O.
It also pointed to an increased reinsurer
appetite for quota share business in order to As a result, it added, supply/demand dynamics
capture the material improvement in market have fundamentally improved for buyers, and
conditions, while reinsurer appetite for excess the forecast across the board reductions in
of loss was more muted. ceding commission have not materialised.
According to the broker, given wide spreads
Demand for US general third-party liability has in performance, ceding commissions varied
remained stable given the continued threat by client, but 1.1 renewals saw more flat to
of prior year development, uncertain loss increased commissions, where original rate
trends, the broader impact of COVID and an increases supported improved forecast
unwillingness to increase volatility, according to underlying results. Excess of loss pricing
Willis Re, with London market quotes generally for professional indemnity reinsurance “has
higher than domestic reinsurers. generally required some exposure adjusted
increase given enhanced hurdle rates, loss
Contract wordings were a battle ground
experience, reduced investment returns and
as terms sometimes tightened more than
loss trends,” it noted.
price increases; with COVID and pandemic
exclusions continuing to be required on a
case-by-case basis. Perhaps unsurprisingly,
the broker noted that reinsurer flexibility was
mixed here.1.1 RENEWALS REPORT 11
2021
ILS
RESILIENCE
The insurance-linked securities arena once “New issuances in the catastrophe bond
again demonstrated its low correlation market have been very buoyant in the fourth
aspects, according to Guy Carpenter, which quarter,” said Guy Carpenter’s chairman David
commented that, overall, catastrophe Priebe, “bringing full-year issuance to $10.8
bond offerings continued to attract billion, a new record for annual property and
significant capital while syndicated sidecar casualty catastrophe bond activity. Most fourth
and collateralised reinsurance strategies quarter issuance was well supported, which
experienced limited new inflows of capital. enabled many buyers to secure the top end of
their size targets (or beyond) at the lower end
The broker noted that January 1 allocations of price guidance.”
were complicated by year-end loss reserve
“buffering” related to COVID-19 and the high
frequency of mid-size catastrophe losses in the
United States, creating uncertainty regarding
the level of capital available for new and
renewing placements:
RETROCESSIONAL
SURGE
While rating increases for a swathe of With the terms and conditions on first tier
reinsurance lines may have turned out to be reinsurance improving, some buyers adjusted
more muted than expected by some weary their retrocession strategies and sought less
underwriters, there was better news for the cover, according to Willis Re:
retrocessional market.
“Rates increased and capacity on an aggregate
Another year of constrained capacity in the basis was constrained but buyers were able
retrocession market saw Howden’s Risk- to source capacity through an increase in the
Adjusted non-marine retrocession catastrophe issuance of catastrophe bonds and the growth
rate-on-line Index rise by 13%, for example, in capacity from traditional reinsurers, who
with four consecutive years of price increases were prepared to allocate increased capital in
seeing the cost of retrocession protection light of the improved pricing and structures.”
return to levels last recorded in 2012/13.
Willis Re noted that a capacity shortage in
the property retrocession market had been
predicted, based on an expectation that
trapped capital would impact ILS markets, “but
in reality, this has not materialised to the extent
expected with some funds even managing to
increase their assets under management.”12 1.1 RENEWALS REPORT
2021
TURNING A CORNER?
The burning question for reinsurers is whether Indeed, according to Morgan Stanley, future
they will come away content from the key renewals for Japan in April, Florida in June
renewal season. According to Morgan Stanley, and the rest of the US and other parts of the
although the headline rate changes were world in July are all expected to see more
below expectations, overall January 2021 pronounced rate movements - but as always,
reinsurance renewal developments were seen don’t get too carried away: “we believe that
as positive: global rate improvements are still on track to
meet our mid-single digit expectation for the
“It is encouraging to see that the market has full year,” while “it remains to be seen whether
finally turned and that the reported changes momentum will continue throughout 2022 and
were ahead of those at the beginning of beyond.” Plus ça change!
2020.” Still, there appears to be room
for further hardening so expect “more
pronounced improvements” in the upcoming
renewals in April, June and July.TO REVOLUTIONISE THE WAY YOUR BUSINESS MANAGES RISK, VISIT ADGO.CO
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