The autumn nights are drawing in. Soon, the September shadow boxing will be over and cedants, their brokers and reinsurers will get down properly to the task of negotiating in detail the structures and terms of their 2022 treaties. After a month of talking to the industry’s thought-leaders and experts, these are the key points that are expected to drive discussions…


1. Named perils vs all risks – a key battleground

Early renewal discussions have marked out the key areas for debate ahead of 1 January, most notably a move by some reinsurers to try to restrict cat XoL coverage to named perils as opposed to broader all risks terms, where cover is presumed unless excluded or sub-limited. 

Guy Carpenter’s European CEO Massimo Reina highlighted the issue in an interview with The Insurer TV earlier this month.

Reina warned reinsurers against pursuing the move as all risks cover is “one of the most valuable things they offer their clients” and reminded them that the willingness to provide broader cover is a clear differentiator between traditional reinsurance and alternative capital, such as ILS.

But he acknowledged the change would “undoubtedly help reinsurers who are keen to align the business they write with the retro protection they buy, which is always on a named peril basis”.

And Convex chairman and CEO Stephen Catlin, both a buyer and seller of reinsurance, noted that named perils represents a “much safer way” of providing cover. “You’re more certain as to what you’ve got. If you go into a more broad form you don’t really know where you are,” he said.

2. Retro uncertainty 

In recent years the build-up to 1 January has been characterised by retro capacity withdrawals, cat losses and an assumption of a capacity crunch in this niche but important $20bn market. In practice the market has cleared in the final weeks, albeit with risk-adjusted rates up and restructuring/moves away from aggregate.

But as we report on page one, there are mounting concerns that an Ida loss that reaches, say, $35bn, on top of Uri and the German floods could fully erode industry aggregate limits.

ILS – a critical component of the retro market – is also likely to once again face the issue of trapped capital and, in all likelihood, further loss creep.

What does this all mean? Well, a late renewal is likely but that doesn’t necessarily equate to a capacity crunch, as recent history has shown. 

However, it will inevitably put upward pressure on rates once again with an increased likelihood of further restructuring with attachments increasing and potentially less aggregate capacity.

3. Rates will go up at 1.1, but by how much?

Despite several large loss events this year, including an expected €10bn+ industry hit from July’s European flooding, KBW has forecast rate increases at 1 January are likely to average in the 2-3 percent range. 

As is customary, reinsurers have been unified in their calls for rate hikes to reflect the current loss experience while brokers have insisted any upward movement will likely be moderate.

With European losses set to represent several years’ worth of treaty premiums, and rates having dipped by 40-50 percent over the past decade, several reinsurer sources have said pricing will respond in a meaningful way at 1 January.

However, Andy Marcell, CEO at Aon’s Reinsurance Solutions, highlighted that people were also talking up the market ahead of last year’s January renewal. 

“I think I said at the time that cooler heads will likely prevail, and they did,” he said.

However, any further deterioration on European flood and Hurricane Ida losses may see average increases hit the mid-single-digit mark, and perhaps go higher.

4. Supply vs demand issues for agg cover

One area where there will be more upward pressure is for aggregate covers, where traditional reinsurance supply is likely to be reduced in the aftermath of several years of losses. 

KBW said ILS funds will likely play a bigger role in the aggregate space, with traditional reinsurers pulling back having broadly lost money on the covers over the past four to five years and amid concerns around the difficulty of modelling the covers when they include multiple perils.

However, ILS investor appetite may be negatively impacted by 2021 losses, with the expectation that trapped collateral will be a major issue again this year and may lead to challenging conversations for fund managers trying to raise fresh capital.

Meanwhile, in the cyber market demand for aggregate protections to sit alongside existing proportional coverages is escalating, according to Guy Carpenter’s Erica Davis.

5. Cyber reinsurance – an opportunity, but proceed with caution

A surge in demand has seen the cyber reinsurance market balloon to between $3bn and $3.5bn and it remains an opportunity for growth for those committed to the class.

Not everyone is comfortable with the risks that cyber entails, however. 

Convex’s Paul Brand, for example, said the company had deliberately held back from the pandemonium in the cyber market, but others, such as Munich Re management board member Stefan Golling, have used #ReinsuranceMonth to reaffirm their commitment to the class. 

“We want to be an opinion leader in cyber and also want to be a market leader. This is something you cannot do if you are questioning the product yourself,” Golling told The Insurer TV.

Amid growing demand, concerns over loss trends have prompted reinsurers to raise rates on XoL structures and push down cedes on quota shares. Upcoming renewals will see a further push for rate by cyber reinsurers.

6. Casualty dialogue to deepen amid concern over commissions 

For casualty reinsurance, the question remains whether rates at upcoming renewals will be sufficient to keep up with current loss-cost trends.

Axis Re’s Allison Janisch said upcoming renewals will likely see a deeper dialogue around the trends facing the industry.

“We need to ask ourselves if current ceding commissions on pro rata treaties need to be sustainable throughout the cycle, especially in the US market,” she said.

With quota share ceding commissions largely in the low 30 percent plus range and a steady drip feed of data points indicating a deceleration of underlying rate increases, reinsurers are again questioning the sustainability of this trend.

7. Covid-19 impasse continues but settlements likely

The can was kicked down the road at the last 1 January renewal and an impasse remains between insurers and reinsurers over stalled Covid-19 business interruption claims and how they will be settled within cat XoL all risk structures. There is currently no indication the issue will be resolved anytime soon, although behind the scenes there are anecdotal suggestions of some recoveries.

Nonetheless, the impasse leaves carriers heavily geared to their reinsurers and the assumption they will be able to collect at 100 percent. 

Recent research by Guy Carpenter analysed six separate justifications provided by reinsurers as to why they were delaying or denying coverage. 

Reinsurer objection

  • The Covid pandemic is not an event but rather an ongoing “state of affairs.”
  • Reinsurers should not have to pay for non-physical damage losses that underwriters did not contemplate.
  • A government closure order is not an event or catastrophe because it is issued preemptively to prevent losses.
  • Defining an event or catastrophe as a Covid “outbreak” requires arbitrary line drawing. 
  • The UK Supreme Court’s FCA test case decision held that an outbreak of Covid  is not an “occurrence.” 
  • The meaning of “event” in UK legal precedent is too narrow to encompass an outbreak of Covid. 

Source: Guy Carpenter

Research published by The Insurer during #ReinsuranceMonth showed that, in the event carriers are unable to collect their assumed share of Covid-19 reinsurance recoveries, UK insurer Hiscox is by far the most heavily leveraged to its reinsurers among its peers. However, Convex’s Catlin predicted this month that settlements will take place. There is “too much money” at stake not to, he exclaimed.

8. Earnings volatility must be addressed

Amid an ongoing dialogue around climate change, secondary perils and escalating losses, it is clear that the factors driving earnings volatility are here to stay. 

This has raised questions throughout #ReinsuranceMonth as to the industry’s capability to manage these exposures and has prompted calls for (re)insurers to reduce their reliance on catastrophe models, most of which fail to capture the full extent of exposures.

As Aon’s Marcell noted, carriers are now increasingly re-examining their portfolio mix as they assess whether investors will reward decisions to retain the exposures which are creating earnings volatility through rising loss frequency.

9. ESG opportunity is real

Several commentators have noted the opportunities presented by the increased industry engagement with the environmental, social and governance agenda. 

Fitch senior director Jeffrey Mohrenweiser argued that climate change could be a “game-changer” for the ILS market, encouraging new sponsors and investors.

Swiss Re’s Jérôme Haegeli called for forward thinking from governments and corporate leaders, alongside engagement from the reinsurance sector, to create a more sustainable future. 

Mike Mitchell, the reinsurer’s head of property and specialty underwriting, said global (re)insurers have an opportunity to step up and provide the solutions needed to spur the development of climate-related technology and protect clients against the perils most closely associated with the changing climate.

10. An ILS resurgence – a dampener effect?

2021 looks set to be a record year for cat bonds as the market continues to enjoy resurgent investor interest following the positive way it responded to the Covid-19 crisis last year (providing liquidity). Q4 is a key period for fund raising for ILS funds but appetite remains strong, as demonstrated by Leadenhall Capital’s Luca Albertini confirming his fund had grown to a new record size.

What impact might this have at 1 January? While it is too early to say for certain, it is likely to have a somewhat dampening effect. One reason, perhaps, that the current received wisdom points to average European price increases of less than 5 percent despite the €10bn+ German flood loss.