Reconnecting non-marine treaty

A look back at last year’s renewal helps us understand what lies ahead, says David Baldwin, managing director of non-marine treaty reinsurance at Ed.

Wind, rain, fire, and disease have battered non-marine reinsurers over the past few years.

Attritional earnings events have hit them one after another, and will have an appreciable effect on the upcoming renewal. An active hurricane season and raging wildfires will only reinforce their resolve to react, as their return on capital is pummelled again.

Amidst a general hardening of non-marine retrocession prices, and persistent if smaller increases in the cost of primary insurance (which continued and intensified since 1.1.20), reinsurance prices have generally been flat outside major cat zones. High and low-level risk markets were disconnected from the reinsurers in the middle.

That unique dynamic will change for 1.1.21. We are certain to see a shift in reinsurers’ resolve as market leaders play catch-up with primary and retro prices. The process will be accelerated by the pandemic, but we don’t expect it to happen all at once. All things being equal, the impact of this current, tangible shift will extend over the next two years or so.

Prices will rise, but coverage changes will have a greater impact on risk-adjusted rates. It’s already history in retro markets, where coverage has moved relentlessly towards named perils. Soft-market “not limited to” language has been almost entirely removed from whole account retro. That claw-back will be transmitted into primary reinsurance treaties with some enthusiasm during forthcoming renewals.

“We are certain to see a shift in reinsurers’ resolve as market leaders play catch-up with primary and retro prices”

Treaty underwriters have already become much more careful in their risk selection, particularly by looking back at the coverage their cedants are granting to ultimate insureds. This, and a close examination of recent treaty performance, will lead to careful consideration of commission levels under proportional treaties, and of terms and conditions across the board.

Covid-19 will spark separate conversations. Reinsurers will need to garner an in-depth understanding of the pandemic’s impact on cedants, of any losses coming through, and of the exclusions in place for new and renewing business. This again follows the lead of the retrocession market, which began its pandemic-linked coverage scrutiny at mid-year.

Markets will be sympathetic, at least to a degree. No one foresaw Covid-19’s impact on BI coverage, for example, which everyone believed they understood. That’s okay; reinsurers expect cedants to encounter underwriting issues, especially when a completely unexpected peril materialises.

But this year they will insist upon an active response. They will need to hear a credible story that includes the identification of underwriting problems and the claims they gave rise to, an explanation – backed up by data – of the remedial re-underwriting measures taken to address them, and an understanding of how those measures have changed the cedant’s risk profile. They will expect the proof to arrive 12 months later.

Cedants with a convincing story should have little trouble securing the reinsurance they need at 1.1, but those who are not forthcoming about the issues in their book, and no story about how they intend to address them, may find they are penalised as reinsurers reconnect.