Battle grounds are already emerging as reinsurers and brokers begin positioning themselves in the lead up to a 1 January renewal where hardening momentum is set to gather pace driven by the “live cat” of Covid-19, emerging losses from nat cats such as Hurricane Laura and concerns over recent accident year casualty reserves.

1.1 Renewal

They include European wind – a tough nut to crack for reinsurers as pricing has stagnated – and casualty/ professional liability quota shares, where cedants argue that surging underlying rates are reward enough but their counterparties claim commissions should fall for increased volatility.

At the same time there are suggestions of a shift in structures at 1.1 in response to changing market conditions in reinsurance and the underlying business.

That could see a move from quota share to excess of loss (XOL) in some instances, as well as the unbundling of some of the consolidated and corporate covers that emerged in recent years as buyers brought together treaties across geographies and business lines in the soft market.

The retro question also looms over the sector although it will be some time before the impact of 2020 cats – including Covid-19 – on collateral trapping becomes clear as well as the ability of funds to raise capital in a challenging environment.

Another dynamic influencing the availability of retro capacity is a pivot by some traditional reinsurers who were big buyers of the product to become sellers as they look to retain more business net in an improving property cat reinsurance market and deploy capital to a hard retro market.

A matter of magnitude

Among reinsurer sources spoken to by The Insurer the talk is not about whether there will be price increases at 1.1 but the magnitude of hardening across different product lines and regions.

Brokers have already been on the receiving end of pressure from their underwriting counterparts. “It’s very rare to have a call with a reinsurer anywhere around the world that is not talking about rates increasing and potentially capacity reducing across all lines of business,” said one senior reinsurance broking executive.

Publicly there is recognition of the reality of the dynamics from both sides – even if there are diverging views over the extent of the shift.

The road to 1.1

On MMC’s second quarter earnings call, CEO Dan Glaser noted that Florida rate increases at mid-year in the 25-35 percent range were some of the highest seen since 2012 and highlighted broader momentum in the market.

“Reinsurers are being cautious regarding the amount of capital they are currently willing to expose in an environment of great uncertainty. Overall global P&C insurance and reinsurance markets remain challenging with accelerating price increases and narrowing terms and conditions,” he said.

Reinsurers have ranged from the bullish – RenRe’s Kevin O’Donnell calling a hard market as the reinsurer raised over $1bn this summer – to the more conservative, with Mike Sapnar of TransRe describing current conditions as “not even close” to hard markets of the past in an interview with this publication.

Privately there is an acknowledgement from senior reinsurer sources that while some segments are in hard market territory – retro, US cat and D&F – others are best described as hardening.

Capital deployment Unlike prior hard markets such as that which developed in the aftermath of 9/11, there hasn’t been wide scale capacity withdrawal or companies with capital issues – even if earlier this year the Covid-19 turmoil promised to put a dent in the liabilities and assets side of the balance sheet.

After the turbulence seen in Q1, the reinsurance industry’s capital base has largely recovered as mark-to-market losses reversed and the pandemic increasingly looks like an earnings event on the underwriting side. Of course there has also been capital raising, by incumbents as well as start-ups and scale-ups.

But at this stage there are few suggesting that new capital entering the space will have a meaningful impact in curbing momentum. As one source put it, new capacity “will not burn itself into the market”.

Alternative capital deployment

Instead, pricing dynamics are being driven by reinsurers need to deliver technical profits, with supply a function of their more conservative stance on deploying capacity – much like what has been seen in the underlying primary insurance sector.

“What you have is weak investment income whether you’re a reinsurer or insurer, and you have increasing loss trends.

So you need to account for that in pricing, as well as the huge uncertainty that remains over Covid losses in litigation,” said a senior reinsurance executive.

So far that points to a hard market in the worst-affected segments, and a more gradual but sustained hardening market elsewhere.

Whether there is a transition to a broader hard market at 1 January depends on a multitude of factors, including cat loss activity between now and then, Covid-19 developments and exogenous shocks on the asset side of the balance sheet.

The European question

But two drivers identified as key to the outcome focus on the behaviour of buyers and sellers of reinsurance in Europe.

The 1 January 2020 renewal largely disappointed reinsurers because they were unable to push for rate increases on European wind business, with cedants successfully arguing that their accounts had run largely loss free and should not punished for loss experience in other regions of the world.

“These European clients are very savvy and they’re hard as nails. It’ll be a question of who blinks first and I don’t think they’ll blink,” said a senior broking source.

They conceded that prices are not going down at 1.1 for European wind, but suggested it is unlikely reinsurers will be able to achieve more than a few points of increase.

The big unknown is how the Continental reinsurance giants of Munich Re and Swiss Re will behave however, with their market power such that if they “walked the talk” and took a tough stance on European deals it could have a significant impact on pricing.

Reinsurers are likely to push the argument that it is a global cat market with a single pool of capital, the cost of which has gone up. The casualty question Another key point of contention as renewal negotiations move forward is cede commissions on casualty and professional liability quota shares.

The last couple of years have seen reinsurers begin to gain ground by securing modest reductions in cede from the peaks in the mid-30s seen at the depths of the soft market.

But buyers this year have been making the case that the dramatic and accelerating increases coming through on the underlying business in areas like excess casualty and D&O in the last 15 months mean that the economics have swung in the favour of reinsurers such that further reductions are not warranted.

“We think ceding commissions are largely flat, except for a bit of pressure where loss ratios are going up. Generally though what we’re seeing on quota shares is that there’s so much rate change at the front end that the pressure on ceding commissions has diminished in the past month or two.

The retro pivot

“So the July renewals were possibly easier to get done on a quota share basis without adjusting cedes than in May or June, because reinsurers had another quarter to demonstrate that this price movement was real,” said a senior reinsurance broking executive.

Reinsurers, however, argue that increased volatility seen in results is not being factored into cede commissions that they say remain too high.

“The rate increases are good, but the volatility of the results have to also be taken into account and you need more margin to pay for that,” said one source, highlighting deterioration on recent accident years driven by social inflation as well as the current Covid-19 uncertainty.

Switch to XOL?

Sources on both sides of the divide have highlighted the delicate balance in a hardening reinsurance market where if reinsurers push hard some cedants with big balance sheets may reevaluate their buying.

Generally the view is that the rate rises coming in at the front end and desire to manage earnings volatility means that demand will remain strong. “I don’t think they’ll take more net… history shows that when losses are coming in you don’t buy less, you buy the same or more,” said a senior source.

If reinsurers get aggressive on cede commissions there could be a switch by some cedants away from quota share to excess of loss, however.

Other shifts in buying trends could see the unbundling of the consolidated covers that rose to prominence in the last years of the soft market.

Accelerated timeline In a normal year the Monte Carlo Rendez-Vous is typically used as a platform for reinsurance intermediaries and reinsurers to sound each other out and begin to signal appetite and expectations on pricing and terms.

This year the cancellation of the conference circuit amid Covid-19 and a wide array of factors set to influence the renewal have disrupted the usual timeline of the process.

GC US property-3

And sources have said that with expectations of capacity constraints and many moving parts impacting dynamics, brokers and buyers are likely to bring the schedule of many renewals forward.

Already this year it has been suggested that typically submissions have been coming in up to a month earlier than usual, with audits (conducted remotely) and other preliminary interactions also taking place more in advance.

There have been indications from some reinsurers – including those that have raised capital to deploy at 1.1 – that they are willing to engage with key clients ahead of the traditional renewal cycle with private deals or committed capacity on placements, provided they meet pricing expectations, with buyers expected to go early if they can.

The strategy was seen at the midyear Florida renewal, where a number of reinsurers did private deals early with cedants for a portion of their programmes.