Deloitte CEO Roundtable: Discussions ranged from an orderly 1.1 to dynamic capital strategies, market sentiment, energy transition and LOCs
Reinsurance market dynamics point to a more orderly renewal at 1.1.2024, but with a clear need for creative solutions that address coverage gaps from recent reductions in capacity, according to a panel of senior industry executives.
Participants in the Deloitte CEO Roundtable – moderated by The Insurer at this year’s Rendez-Vous in Monte Carlo – suggested lessons had been learned from the late and chaotic January 2023 renewals.
Andy Marcell, CEO of Risk Capital at Aon, described last January’s renewals as “a bit of a failure”.
“The reinsurers of the last cycle of 1.1 were pretty terrible in the way they treated their clients and the way they organised their capital,” Marcell said. “It shed light on: what's the true understanding of risk? What’s the reliance upon retro? And how could they articulate to the client base what they could do in an orderly fashion?”
However, Marcell said the market had since got better organised and learned to articulate risk appetite in more coherent ways.
“We want to have orderly renewal – the price will be the price and the coverage will be the coverage, but the ability to respond to clients who need to organise their own capital and execute their own plans will be the most important thing,” he said.
Vicky Carter, chairman of global capital solutions, international, at Guy Carpenter, said she did not anticipate dramatic price increases at 1.1 given the major increases imposed between the July 2022 and January 2023 renewals.
“If it had come incrementally over many years, it would have been easier to absorb. However, with the tremendous rate increases, as well as significant deductible level changes and tightening of terms and conditions, the direct market has been impacted on multiple fronts within a very short time period. Now they're having to adjust their portfolios in response,” she said.
Carter said the big question for 1.1 will be whether new capital enters, given the current stage of the rating cycle.
“Everything is dependent on the cost of capital, and the fact that (re)insurance companies inherently need, at the very least, to cover their cost of capital. But if there's another major catastrophe in the next couple of months, that will likely change the dynamics,” she said.
“We're in such a volatile world, where there are so many different macroeconomic headwinds and challenges relating to financial instability. I don't think you can categorise the whole market as being in a hard market or in a soft market state, it's very dependent on the line of business. It’ll be very interesting to see how things play out over the next three months.”
The shift in reinsurer appetite away from lower nat cat layers has been one of the major talking points of recent renewals, increasing retentions for primary carriers. Given the high level of catastrophe losses retained by primary carriers during 2023, there is a need for innovative solutions to meet the coverage gap.
“I think you will see a lot more interest in developing innovative solutions at the lower end of programs, whether that comes in the form of structured reinsurance or spread loss covers,” Carter said.
“There will be a need for more holistic strategies as we move towards 1.1, designed to achieve enhanced capital efficiency and improved capital optimisation,” she continued.
The Guy Carpenter executive added that a lot of companies will look to optimise their balance sheets and explore options such as loss portfolio transfers in the context of their reserving strategies.
“I think that there will be a greater focus on balancing the balance sheet. We have seen a lot more markets come back into the structured space, and as a result there’s a lot more capacity available now for these types of solutions,” she said.
Guru Johal, Deloitte vice chairman and global speciality and reinsurance leader, also highlighted the need for creative solutions.
“There's a real interesting dynamic on how the market sees the continued availability of reinsurance – corporates and insurers are retaining more risks given the reinsurance market dynamics and there are additional risks that we can't get insurance for,” he said.
“It's an interesting dynamic – where you look at the relevance of risk from source to end, more risk being retained, capacity appetite reducing – and overall market solutions need to be more creative. I see some of our clients really grappling with that, both from a corporate and carrier perspective.”
Liberty Mutual Insurance’s president of underwriting for Global Risk Solutions Matthew Moore – who provided the perspective of both a buyer and seller of reinsurance – said reinsurer sentiment would play a significant role in driving market conditions at 1.1 and beyond.
“There's two things at play. There's the way the capital works and all the arithmetic that goes with that supply of capital, rates and demand and so on, but then there's also sentiment,” he explained.
“A lot of executive teams of reinsurers are under a lot of pressure to be able to get those results – they've either been that executive team that had some very challenging results and are coming through the other side, or they've been put in to turn the ship around.
“That sentiment is really important, not just in terms of the arithmetic of aggregate supply of capital versus aggregate demand.”
Swiss Re Corporate Solutions CEO Andreas Berger said only a few reinsurance companies were open about their strategies at last year’s renewals.
“There was a large group where it was almost silent, the market was almost paralysed for two months or so as we built up the renewal discussions,” Berger said.
“I hope it will change this year. I think it will, because it was a new situation for a lot of reinsurance companies to position themselves properly. I get there’s a lot of uncertainty, but I think we have got to be much more communicative.”
Michael Pickel, member of Hannover Re’s executive board for P&C, questioned why the industry had not evolved its buying process.
“Everybody's waiting for the middle of December in the expectation to get the best price, and then unfortunately it doesn't happen.
“I have been attending Monte Carlo for more than 25 years and it’s the same procedure every year. We know that we are getting close to year-end and we already know that we need more capacity for many risks due to inflation and whatever, but nothing has changed over time.”
Deloitte’s Johal was among several senior industry figures to voice concerns around casualty volatility during this year’s Rendez-Vous.
“When I hear insurers and reinsurers worried about volatility, so they come out of nat cat and write more longer-term casualty, I am concerned. Casualty has a different type of volatility – a more long-term volatility.
“Normally by the time you realise how much is already underwritten and on the books, it's a different type of volatility to manage than nat cat.”
Mark Cloutier, CEO of Aspen, echoed the concerns on the casualty pricing environment.
“I just don't understand, frankly, why in any of the classes we’re in right now, people would see sense in reducing rates,” he said.
“Long-tail classes are seeing the impact of social inflation – I refer to it more as social impact and attitude changes in society – and we are going to be under pressure, as we have been over time, for a long period of time, to deal with social issues.
“As attitudes change and governments feel pressure from that, we're going to see more get pushed our way than we have seen in the past. I just don't see with all the uncertainty how declining prices will be sustained.”
Cloutier said the declining pricing environment would hit a floor – at which rates may still be adequate – but questioned whether it would be enough to build up balance sheet strength for such a volatility class.
“I do believe that we'll see equilibrium at a more rational place than before, because everyone is concerned about the uncertainty that we're facing out here,” he added.
Alongside renewal discussions, the roundtable also posed questions as to the industry’s role in the energy transition and its broader ESG responsibilities.
The executives were united in their belief that the industry should not seek to police the transition.
“We’ve got to be responsible in how we communicate about those topics we need to engage in,” Swiss Re’s Berger said.
Aspen’s Cloutier said it was “not our job to force a moral compass on businesses. It's our job to look at our own business and say, ‘what do we believe is the right thing to do?’ If that extends to looking at and underwriting businesses that are doing the right thing by our definition, even if they are carbon contributors today but have a transition plan, then let's support them.”
Guy Carpenter’s Carter said the industry’s role was in how it helps companies “make the transition to a newer, greener, cleaner energy environment”.
Deloitte’s Johal added that although the global nature of the industry makes some cross-jurisdictional conversations around sustainability agendas more complex, there are encouraging signs that progress is being made, particularly with ESG rising as a board and C-suite priority.
“What the solutions are and what that really means is trickier. Clients have given us examples where there is withdrawal or significant reduction of capacity due to a reinsurer’s ESG concerns. Capacity is becoming contingent on commitment,” he noted.
“It's complex, because it depends on what your own ESG appetite is, the type of industry being covered, and its exposure to certain risks and regions. It's becoming more of an item that's being discussed more prominently now than it was even two years ago.”
LOCs set for greater scrutiny following Vesttoo crisis
Letters of credit (LOCs) will now be more closely scrutinised following the Vesttoo collateral fraud scandal, the executive panel said.
“Where before an LOC that was fully collateralised generally got a tick, now there will be a lot more scrutiny, more probing to see what actually sits behind this – which should be expected, given the amounts involved,” explained Deloitte’s Johal.
Swiss Re’s Berger said the Vesttoo crisis was a “wake-up call” for the industry, with several billion dollars of LOCs identified as invalid in the fallout.
“It's a reminder to apply the instruments and governance we have. I would expect to see some people in credit and risk management departments waking up and asking more questions. At the end of the day, brokers and clients should be prepared – it's a normal reaction, because it's about the credibility and reputation of our industry,” Berger said.
Aspen’s Cloutier also voiced concerns around the future use of LOCs. “It's worrisome that one set of bad actors could beget additional oversight and regulation that is entirely unneeded. Perhaps some due diligence and some practices should have been better,” he said.
“But if you think about the length of time and hundreds of billions of dollars of credit that has been secured this way over decades, this incident should not drive rating agencies and regulators to, for example, start loading capital charges,” he stated.
Any disruption to the use of LOCs could have meaningful impacts on the use of fronting carriers as a conduit for reinsurance capacity accessing program business, as well as for the nascent but growing use of alternative capacity to support the sector.