January renewals: significant rebalancing but systemic issues still loom large

In what has been described by many as one of the toughest and most gruelling January reinsurance renewal for decades, Swiss Re's Gianfranco Lot, Head Globals Reinsurance and Mike Mitchell, Head of Property & Specialty provide their perspectives on the 1.1 renewal which came down to the wire.

Since last year's conference season many experts across the industry, including Swiss Re, had warned of a challenging 1.1 renewal as the reinsurance industry contended with multiple issues – could you help to put this into context and highlight why this was predicted?

Gianfranco Lot: Prior to the renewal there was a perfect storm developing that meant reinsurance wordings, structures and prices needed to be strongly reviewed during the 1.1 renewal.

Firstly, the re/insurance industry is cyclical and over the past few years there has simply been too much capacity flowing into the market. For example, various non-traditional capital providers have entered the market, but also existing reinsurers have deployed surplus capital to support growth aspirations. The increased capacity had softened the market and created an imbalance between demand and supply for reinsurance.

Reinsurers in general though haven’t been able to cover their cost of capital, let alone satisfy both shareholders expectations and generate new capital to support clients' needs.

Mike Mitchell: It's also important to add that this renewal is not unprecedented. We have seen supply and demand equilibrium needing to be rebalanced in past cycles – with the renewals following Katrina, Wilma and Rita in 2005 and after 9/11 for example.This rebalancing typically causes increased stress in the system during the renewal process as we've seen this year.

Terms and conditions have also dramatically deteriorated over the past 10 years. As the market softened, reinsurance structures have provided more and more cover designed for earnings volatility rather than capital preservation.

Contract wordings had become broader and have stretched the boundaries of what was intended by reinsurers, as was shown by the disagreements over Covid Business Interruption (BI) claims. At the same time, the risk environment has become more challenging, with globalisation and increased litigation. Wordings need to keep up with these developments.

Gianfranco Lot: And finally, last year we saw reinsurers hit hard by devastating natural disasters. These events, coupled with the horrific war in Ukraine, which also led to increased inflation rates and impacted aviation and marine war covers, have accelerated the momentum for sharp price increases and higher net retentions for cedents.

Although the renewal is largely complete, it was tense and late – what was the root cause of this distress?

Gianfranco Lot: Although several clients were able to close their programmes with us in early December, the renewal period was extremely uncertain until the very end. This was largely due to many reinsurers negotiating their retrocession capacity until the end of December. Naturally this delay caused distress for insurers and their brokers as they didn't know if they could complete their placements.

Mike Mitchell: Also pivotal in my mind was the hesitancy of the financial markets to provide new capacity into cat bonds, sidecars, or other alternative capital instruments. After the losses of the past years, coupled with interest rates rising, many investors are looking for a better performance. This has contributed to the limited retrocession availability in the market.

If we look at selected lines of business, property was heavily constrained due to cat capacity availability because of heavy losses in the US and Europe. Many reinsurance players either withdrew completely, or limited capacity, and ILS capacity was trapped following prior year losses and Hurricane Ian. This led to increased prices in property lines and changes to contract attachment points.

On the casualty side many reinsurance players shifted capacity into this line of business as they moved away from property coverages. So, on the casualty side we actually saw a disciplined but orderly renewal.

For specialty lines there was a mix of very hard and softer conditions as lines were impacted by the ongoing war in Ukraine and economic volatility.

So, how was Swiss Re available to support clients and brokers during the renewal process?

Gianfranco Lot: Swiss Re tried to be predictable and consistent. We approached clients early and listened to their expectations but also alerted them to the distress in the market. Importantly we were also one of the very few players that had the willingness and boldness to quote early – before Thanksgiving in many circumstances – and with meaningful lead shares.  This helped clients to effectively manage their own board and stakeholder expectations in good time before the renewal.

We also received positive feedback from clients and brokers that our quotes were balanced and not seen as excessively high.

And finally, I would add that relationships do matter. The trust and mutual reliability that we have established with clients over many, many years was a vital component in this renewal. And, in a number of cases clients came back to us to help them complete their programmes.

Covid losses were a big topic at the 2020 and 2021 renewals – was this also a factor at this year's renewals?

Mike Mitchell: Covid was a talking point this year but more from the perspective of concluding the ongoing discussions about BI claims with partners. This really boiled down to a major question on how to accumulate losses. We're delighted to have found consensus here after difficult and challenging conversations.

Covid has presented the re/insurance market with several vital lessons and how we, as an industry, factor in scenarios that were previously unthinkable in order to make the word more resilient. It also unearthed a much wider issue that we focused on during the renewal, which was to get further clarification on contract wordings so that all parties are equally clear on what the reinsurance policies cover and what they don't. It has become clear that reinsurers have received limited insights on what is covered in many underlying wordings, and ongoing work will be required to either improve the transparency of underlying wordings, or have tight and explicit reinsurance exclusions. Key topics included strikes, riots and civil commotion and non-damage business interruption, specifically around critical infrastructure.

While a lot of ground was covered in the January renewals, there remain a number of challenging themes around what and how risks are covered by reinsurance contracts. For the industry to attract enough new capital to meet significant demand growth, we need to continue to work to address systemic risk themes.

What are your expectations for the 1.4 and 1.7 renewals?

Mike Mitchell: The general themes and consistency of the 1.1 renewals that we've discussed here will play out during the 1.4 and 1.7 renewals. However, we expect them to do so in a more orderly fashion simply because retrocessions are now in place and reinsurers will know exactly what they can and can't cover. So, we should see some of the stresses of the 1.1 renewal disappear while the much-needed rebalancing momentum continues.

Gianfranco Lot: We also ask clients and brokers to talk to their boards and executive committees about the reinsurance market. Talk to them about the 1.1 outcomes, which should indicate that budgets and/or the scope of covers will need to be significantly adjusted.

From our side though we will continue to be predictable and stable – providing lead quotes well in advance of the renewals.

Finally, now that the dust has settled, what are clients focusing on in the immediate aftermath of the 1.1 renewals?

Gianfranco Lot: Already clients have approached us to source structured solutions, which can support them in addressing some of the impacts of increased retentions and underlying capital management concerns.

In addition, we are seeing increased traction for our Reinsurance Solutions, which are helping clients to get a different perspective on risk. Solutions like CatNet and benchmarking reports from our analytics team, for example, are growing in popularity amongst clients.

Mike Mitchell: Outside of the transactions and solutions space, we will continue to partner with clients to help them to anticipate and manage existing and emerging risks and close the protection gap. Ultimately working with clients in partnership to make our world more resilient.

Gianfranco and Mike, thank you for your time and views on the recent renewal.