Roundtable: Brokers and reinsurers hoping tensions will ease in a smoother mid-year renewal
The Insurer in association with AdvantageGo held a roundtable of leading executives in Bermuda last month, where the panelists reflected on a grueling renewal season at 1.1 and expressed hope that the rest of the year would be somewhat calmer.
The executives on the roundtable had a lively debate about the 1 January 2023 renewals, which saw reinsurers demand not only significant price increases but also changes to terms and conditions.
Lara Mowery, global head of distribution at Guy Carpenter, said renewals for the rest of the year should be more orderly and not “quite as chaotic”.
Ben Radford, head of Bermuda at Gallagher Re, suggested that “ten years of softening was arguably corrected in two weeks for some European buyers” at 1.1.
Speaking several weeks ahead of a 1.4 renewal that has now just completed, he noted that Japanese buyers have been through significant changes in attachment point and price in recent years. “They’ve obviously been through a cycle of material adjustment since 2018,” Radford said.
Radford suggested that the mid-year renewals will hopefully be smoother than 1.1. He said one of the biggest challenges brokers faced at 1.1 was the more compressed timeline of renewal discussions.
“The market got a lot more dislocated, just by virtue of the fact that we didn't have the usual level of price discovery in as much of an orderly fashion as we would like,” he said. "I think all the clients’ expectations were suitably managed leading into the market. But a more limited number of data points created additional challenges in providing clients with sufficient, robust, enough advice about what the market clearing price was.”
He added: "I think going into mid-year the market place will become more orderly because most of the retro dependencies should be bedded in."
1.1 a “first step” in getting pricing right for the risk
Megan Thomas, CEO of Hamilton Re, suggested that the momentum that reinsurers’ achieved at 1.1 needs to continue.
“I think the structural changes via terms and conditions at 1.1 were necessary,” Thomas said. “There were broader coverages that had crept in over time, which was started to be evidenced during Covid. Some of the policies were broader than what was modeled so the narrowing of the terms to named perils or specific perils in some instances was welcome and necessary to get the pricing right for the risk.”
She added: “We can't go back to having pricing that is inadequate for the risk we're taking on but we also need to be very clear about the risks we are taking and pricing for it. I think that was the first step at 1.1 to be able to do that.”
Thomas said that an interesting facet of the renewal was that the rate increases were such that a lot of lower layers were retained net.
Discussing Florida, Christian Dunleavy, group CUO at Aspen, commented: “I don't get the feeling that the reinsurance sentiment is going to shift at all in the near term. I think the Florida market is turning into a public taxpayer funded reinsurance market. It's going to be very difficult to structurally change that in the near term.”
The executive noted that Aspen is “quite underweight” in the Florida domestic market, and has shifted its cat appetite more towards nationals.
The panelists noted the Florida property insurance reform passed in the special session in December and questioned whether it was enough to convince reinsurers about the market.
John Huff, president and CEO of the Association of Bermuda Insurers & Reinsurers, commented: “Florida is answering that question for you because after their special session they’re considering more reforms.”
Since the roundtable was held Florida’s legislature passed the comprehensive litigation reform Huff was referring to.
But during the discussion Dunleavy suggested it would be a long time before confidence in Florida was restored in any case.
“I don't know what their incentive is to go back to a true private market structure in the state, where you're paying insurance at a reasonable level. It feels to me like the state is willing to run that risk, just to keep the rest of the economy going,” he said.
Dunleavy added: “It’s not just price, but with enough sensible structural change to get all these behavioral problems out of the state you could see reinsurers having appetite for that risk. But I don't think it's going to change in a year or two.”
A “massive” messaging task
Tensions between reinsurers and brokers were strained at times during the 1.1 renewal. This may have been inevitable given the big changes being pushed through.
But the sense during the roundtable discussion was that things could have gone smoother if everyone was on the same page - reinsurers, brokers and cedants alike.
Mowery at Guy Carpenter said it was a “massive task” to manage messaging with clients. This effort began during the fall meeting schedule.
“A lot of that messaging in meetings between clients and brokers focused on price correction, and attachment point correction,” she said. “We tried to really prepare people for that, and I think we had mixed success.”
Mowery suggested that there needed to be more consistency in quotes from reinsurers.
“The biggest shock or difficulty was the terms and conditions, which didn't really start to come out in the conversations until we started getting quotes,” she said. “A lot of the changes began to come through with no consistency by reinsurer.”
The executive explained that certain things were important to certain reinsurers that were not important to others, or reinsurers were focusing on the same things as important but with different contract language that their legal departments have mandated.
This created certainty of coverage issues, she said, noting the ramifications of there being non concurrencies across a portfolio.
Thomas at Hamilton Re responded: “It's interesting to hear that brokers were not receiving the message that wording was too broad. There were early indications that the way that losses were being presented was not in the way that it was underwritten. From our perspective, we were delivering those messages back at Monte Carlo and CIAB.”
“Coverages needed to be cleaned up”
Ryan Mather, CEO of Ariel Re, picked up on the theme of non-concurrency raised by Mowery. He noted that this is a challenge for the brokers, but suggested that reinsurers have also had their issues with this in recent times.
“We had to suffer some different types of non concurrency last year,” Mather said. “A really good example was the Australian floods, where I believe one client collected as one event while, at the other end of the spectrum, one client collected as five events.
“Now, that suggests to me that we didn't really understand the product we were selling, and therefore we all needed to tidy it up, because otherwise we're going to court and we're causing even more issues down the line. So I think in the long run this probably clarified things rather than made it worse, but I get there is short term pain.”
Trevor Carvey, CEO of Conduit Re, suggested that “the devil is in the detail”.
“The general message was given that the coverages needed to be cleaned up,” Carvey said. “One consequence of this was non-concurrent terms. But the problem was that everyone then becomes a drafter of manuscript wordings with two weeks to go. That’s the problem and we saw it happen time and again - a departure from tried and tested clauses.”
Stephen Catlin, executive chairman of Convex, suggested that underwriters need to grab the chance to address some fundamental issues when they can.
But he added: “You're much better off having standard wordings. And you get case law behind them and everyone knows where they stand.”
Reinsurers themselves also had to contend with contractual changes in their retro buying.
Aspen’s Dunleavy noted that most of the carriers at the roundtable were buyers and sellers of reinsurance in one form or the other.
“I gave some people their own retro terms back on their reinsurance quotes, and I had them say to me, ‘That is a ridiculous thing to quote.’ And I said, ‘You may want to go talk to your retro underwriter over there because those words are literally copy and pasted from the retro quote, and I'm trying to make sure I'm aligned with that coverage there.’
“So there was inconsistency within products that were being sold as well. It is a nightmare. My general view is that the brokers have historically kind of had the upper hand on that, because it's one negotiating against many and have been able to slip things through,” he said.
Dunleavy also suggested that brokers should think about whether it is in their best long term interest to hold rates down as low as they possibly can for as long as you can.
“Because the snapback is more severe, which is what happened at 1 January. The elastic band kind of broke, because it got stretched so thin,” he said.
Conflict needed for the market to progress
Chris Hayward, Bermuda CUO at MS Reinsurance, suggested that the changes pushed through at 1.1 would not have been possible without tension.
“Does it take the conflict that we had at year end to make the changes?” he asked. “Because there's no motivation or resolve to make those changes unless we have this conflict. But it’s not right for us. It's not right for the client.”
Guy Carpenter’s Mowery expressed hope that, with the time to take stock between 1.1 and the 1.4 and mid-year renewals, proceedings will be much smoother for the rest of the year. She reiterated that it was when brokers late in the day got the actual specific changes that reinsurers were demanding that 1.1 renewals “really started to get complicated and real”.
“Going into April through July, we have some revision to that from some reinsurers who are saying, ‘Coming out of 1.1 we've evaluated where we ended up.’ And the ‘need to have/nice to have’ conversation is coming into play where some reinsurers have come back and said let’s focus on the need to have and how are we going to get consistent language around that.”
She added: “We certainly don't have that from everybody. So the more of that we can get now, we can start the conversations. We're happy to facilitate conversations across the market to try to come to a landing place where we do get better conconcurrency.”
Aspen’s Dunleavy conceded that clients may not have appreciated the extent of the changes that were going to be made at 1.1 because they had heard reinsurers talk a good game before only for the price increases and other changes to be less than they were saying.
“What’s different now versus back in September and October was to a certain extent it had all been said before but nobody ever really followed through,” he said. “So the conviction was there this year. Now they know that's real and you can maybe have that more structured conversation.”