Attendees at the Guy Carpenter Baden-Baden Reinsurance Symposium on Sunday may have been relieved to hear speakers agree that 1.1 European reinsurance capacity overall will not be in short supply, as is expected across the Atlantic. 

1.1 battleground

But equally they all predicted reinsurers will be more exacting in how they price and apply their capacity in 2023. Treaties will be restructured, attachment points will rise (significantly in some cases), cedants will be expected to share more of the working layer risks and rates on line will increase. 

Brokers will naturally fight hard for their clients but speaking privately many recognise the inevitability of the above and see their role as moderating the onerous impact as much as possible when treaties are renewed. 

But might this pressure also extend to evolving the standard all risks cat cover into a named perils product – arguably the sign of an ultra-hard market? It is a subject that reinsurers are now floating. It is also one where brokers are displaying much greater resolve. 

“This is an important role that if tomorrow, the traditional reinsurers didn’t have anymore, it would be a massive loss of value”

Take Guy Carpenter’s European CEO Massimo Reina, for example. 

Speaking at the Symposium, he told the 600+ attendees that all risks cover was one of the most valuable aspects of the reinsurance product.

“This is an important role that if tomorrow, the traditional reinsurers didn’t have anymore, it would be a massive loss of value,” Reina warned.

But reinsurers writing European property cat – which have been hit by a triple whammy of unexpected losses: 2020 Covid-19 business interruption (BI), last year’s €12bn+ European floods and this summer’s €6bn+ French hail storms – are in a demanding mood.

There were mutterings at last month’s Monte Carlo Rendez-Vous, for example, that BI might be capped in French treaties following the unexpectedly high commercial loss component of the May/June hail storms. 

Since then the prospect of a $50bn+ Hurricane Ian loss – and the near certainty that 2022 will be another $100bn+ cat year – has only reinforced their zeal. 

Global Q1-Q3 insured losses (2022 $bn)

Sub-limits, of course, are a standard feature of current cat/all risks cover as are exclusions. At the 1 January 2021 renewals, for example, the focus was on imposing clear exclusionary language around pandemic BI in treaty wordings. 

But moving entirely from all risks to named perils would be a significant pendulum shift: the risk equivalent of being presumed innocent and having to prove guilt rather than the onus being on proving one’s innocence. 

Reinsurers are, however, feeling the pressure from their own retro supporters. The days of plentiful aggregate capacity – fuelled by low layer/pillared retro cover from the likes of CatCo – are long gone. As this publication has reported, retro capacity will be in short supply and increasingly focused on named perils following another year of trapped capital among ILS funds. This will make it all the more difficult for smaller reinsurers and ILS funds to provide all risks reinsurance cover. 

The spectre of double-digit economic and social inflation, man-made losses (note aviation reinsurers recently hammered by the $1.3bn Boeing loss deterioration) and war in Europe will only stiffen reinsurers’ backbones further. 

Nonetheless, The Insurer is sceptical that reinsurers will succeed at 1.1 in converting European coverage from all risks to named perils. After all, despite some notable exits this year (Axis Re and Tokio Marine Kiln, for example) capacity is expected to be available even after taking into account the impact of additional inflation-led demand.

”Would Allianz, Axa, Generali or Zurich tolerate such a dramatic shift in terms? No, is the short answer”

Why? Well, Europe is also the heartland of the industry’s four largest global reinsurers and a market where relationships, continuity of cover and conservatism is valued. It is also one where the largest cedants have enormous buying power. Would Allianz, Axa, Generali or Zurich tolerate such a dramatic shift in terms? No, is the short answer. 

Nonetheless, it is a sign of the shifting sands that it is even being contemplated. Europe’s reinsurers have struggled to assert themselves at 1.1 for years, always mindful of the fierce competition they face. The negotiating power was always with the cedant and their brokers. Resolve was on display last year – arguably the first time in a decade. It appears even more resolute this year…