The rhetoric around the 1/1 renewals has taken on a familiar tone for the last few years and the 1/1/19 season was not hugely different. We spoke to some of our teams to understand their experience and see how clients and markets fared.
Overall we saw reinsurers show initial resolve but relent under pressure in what remains a competitive and overcapitalised market, despite pockets of constraint. Buyers who stuck with their incumbent partners tended to achieve the most satisfying results, showing that relationships remain important.
Nowhere was this clearer than in the London property and specialty market, which has had a tough two years. The absolute value of longstanding treaty relationships was illustrated, particularly for those hit hardest by severe loss activity. For Lloyd’s clients who had suffered severe losses during 2018 the mandate at 1/1 was survival. This sentiment was mirrored in the ILS market where we saw a reduction in funding and capital constraints. ILS reinsurers achieved solid rate increases on excess of loss and reduced ceding commission on quota shares.
Buyers of international proportional and excess of loss property reinsurance expected a flat renewal, but after a slow start were able to achieve rate reductions for non-loss territories, since capacity remained plentiful.
For our marine and energy clients their priority was to manage their retentions at a similar spend to the expiring programme. Most business renewed ‘as before’, although some excess of loss programmes in Marine were affected by the Lürssen shipyard fire and tended to attract small increases. It was a similar story for upstream energy clients, with small improvements in some cases for both excess of loss and proportional reinsurance business.
Cyber continues to remain in a unique position. We saw a large increase in capacity this year driven both by new players entering the space and existing carriers deploying significantly more capital to the space. With this came further product innovation as markets grew more comfortable with the risk as a whole. While this proved a favourable result for the buyers, this influx did not have the same impact as it would on other classes due to the continued growth in demand. In addition, as reinsurers’ aggregate continues to grow we are seeing many more reinsurers looking towards retro options, which is now developing into a major part of the market.
Motor clients saw rates remain flat at 1/1. It has been a turbulent time for the motor market in recent years. The change in the discount rate in February 2017 effected substantial reinsurance rate increases and uncertainty prevailed throughout 2018. Much of this uncertainty has been removed as a change to the methodology used to calculate the rate is imminent; this change is expected to result in a rate that is more reflective of current investment returns. Consequently, the 2019 renewals were much more stable than previously, and typically flat as a weighted average of original premium income. Loss experience, rather than market conditions, drove any increases. Where Capsicum Re was able to illustrate clients’ portfolio de-risking, nominal rate reductions were achieved.
It was a tough picture for US Casualty. Casualty reinsurers sought significant increases. Some leading markets played hardball, but either capitulated or were replaced by new markets.
Meanwhile at the top of the risk pyramid, retrocession buyers sought capacity early with existing markets, and typically hoped to reduce volatility through lower retentions. Retrocessionaires sought top returns, but weakened towards year-end, holding their ground only on aggregate structure placement. Buyers were generally successful in achieving the coverage they planned at or below target prices, although loss-affected retro buyers paid about 20% more.
Overall, with very few exceptions, the 2018/19 renewal period remained flat despite the heavy losses sustained in 2018. The soft market prevails, alternative capital remains abundant and the pressure facing reinsurers continues.