The absence of the annual Monte Carlo Rendez-Vous and the platform it presents has not prevented reinsurers from asserting their view that meaningful improvement in pricing and terms and conditions is warranted at the upcoming 1 January renewal.

Industry-wide US casualty accident

Executives have been lining up to go on the record about the imperative for hardening beyond the strong rate improvement on the underlying business that is flowing through quota shares.

Topmost in the arguments they are using are the twin forces of social inflation impacting more recent accident years and the “catastrophe” for casualty underwriters of record low interest rates.

And they are also suggesting that the inflow of capital seen so far in the Covid-19 fallout – including the known start-ups on the way – is not at a level to offset upwards pricing momentum.

The drivers...

Speaking to The ReInsurer earlier this month, Scor Global P&C deputy CEO Laurent Rousseau said the negative impact the low interest rate environment has had on long-tail insurance classes may have been underestimated by some in the sector.

“The reinvestment rate on the asset side of an insurance company’s balance sheet has decreased meaningfully. That means that the adequacy of long-tail classes is further away. Rates will have to increase much more to compensate for lower investment income,” he suggested.

The relationship between the assets and liabilities side of the balance sheet for reinsurers means that a 100 basis points fall in interest rates needs to be countered by a 300 basis points increase in rates.

Interest rates ‘catastrophe’

A year ago there had been the expectation that interest rates would continue to move incrementally up.

But the actions of governments and central banks in response to the Covid-19 economic shock means that instead interest rates have moved the other way in 2020.

For Axis Re’s president of North America Jason Busti low interest rates are “nothing short of a catastrophe for longtail lines”.


As Barclays equity analyst Ivan Bokhmat noted in our latest virtual debate last week, US interest rates have dropped by 1.5 percent so far, “so it’s very easy to comprehend why rates [pricing] have to go up”.

The theme was picked up by Swiss Re’s head of casualty underwriting for reinsurance Jason Richards.

Noting that interest rates have dropped by as much as two points in some areas, he said that a “lot of action” is needed to account for the five or six points impact that has on profitability.

1 July casualty rate movements

He suggested that reinsurers will push for tighter terms and conditions on wordings and also apply pressure on commission levels, with “many” contracts that have cedes set too high

“There’s still many contracts with commissions in the mid-thirties. They need to come down from a reinsurance perspective,” he argued. Reinsurer executives spoken to by this publication all acknowledged the meaningful improvements being seen on underlying pricing in casualty and professional liability, with some segments of the business in true hard market territory.

They also noted the benefits coming through on quota shares and excess of loss from moves by insurers to derisk and improve the quality of their portfolios by shortening limits and tightening T&Cs.

Loss cost trends

But executives have also questioned whether the improvements being seen are enough to keep pace with loss cost trends as social inflation shows no sign of diminishing. Speaking to The ReInsurer, Swiss Re’s reinsurance CEO Moses Ojeisekhoba said it is “abundantly clear” that the scale of claims being driven by social inflation could not have been contemplated in underwriters’ pricing and terms and conditions over the last decade. That means liability lines require significant rate increases over multiple renewal seasons if they are to catch up with loss cost trends.

“We now see that prices need to be in the double digit range in the liability lines for a few years, not just one year, for a few years, in order to be able to catch up with the loss cost,” the executive suggested.


Busti said that there are signs that rate increases could be starting to outpace loss trends.

“But we don’t know necessarily where the starting point is, and there are many macro variables right now that are influencing and will influence the run-off of casualty,” he warned.

For Busti, further increases on underlying pricing need to be combined with lower cede commissions for reinsurers, to ensure that there is alignment of interests between the parties on a treaty.

Client selection

While there is strong agreement among reinsurers that pricing and terms must improve across the board at 1.1, they generally claim that they will continue to treat each cedant on their individual merit rather than look to take a blanket approach to the renewal.

Axis Re CEO Steve Arora told this publication that with many unknowns – including around the ongoing impact of Covid-19 – it was unclear at this stage whether underwriters should be defensive, expansive or maintain a neutral position in casualty.

But he said that for a reinsurer identifying the best cedants in this marketplace is critical to maintaining a profitable book of business.

“I think you really need to select the partners you believe are going to do well over the cycle and in the future, so I think there will be a heavy emphasis on client selection,” he predicted.

Arora added that reinsurers supporting insurers on a quota share basis need the rate improvements as well as a “stronger portfolio”, with insurers management of limits one factor that can help achieve that.

Reinsurance brokers spoken to by this publication have largely acknowledged the pressures expected at 1.1 in casualty, but have emphasized the importance of treating cedants on an account-byaccount basis.

Aon’s Reinsurance Solutions CEO Andy Marcell said that so far, despite modest reductions in quota share ceding commissions, reinsurers have been focused on evaluating cedants at an individual client level to understand the original rate change and the way that limits are being managed.

That is in contrast to the aftermath of 9/11 when a “knee jerk reaction” from reinsurers saw them impose significantly reduced cede commissions and demand loss ratio caps and loss corridors.

“Even though there were a lot of rate rises they said ‘we can’t do that anymore’ and reinsurers that were going to stay in said they would impose significant restrictions. And the clients just didn’t buy,” said Marcell.

“If that comes back to the fore it will be a mistake. All they will achieve is driving buyers away, leaving them with those that really need the cover even at those terms and conditions as their clients, which generally doesn’t work out well for them,” he suggested.

There have been more forceful responses from brokers, however.

Broker pushback

Also speaking to The ReInsurer, BMS Re CEO Pete Chandler said brokers will “push back hard” against further attempts from reinsurers to reduce ceding commissions for US casualty quota shares.

Chandler said he and his colleagues do expect pressure on casualty quota share ceding commissions from reinsurers, but said clients’ use and understanding of data will play a key role in fighting back against such moves.

Reinsurance buyers that are able to provide a greater depth and better understanding of their data compared with their peers will benefit when it comes to negotiating terms, he added.

“[Clients that] can point to the underwriting acumen and the changes that have been made in their policy forms and their pricing paradigms will continue to generate a ceding commission on quota shares with a 3 in front of it,” said Chandler.

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