When an AM Best analyst said, “Apparently, things didn’t go that bad” to describe 1/1 reinsurance renewals, he wasn’t actually saying anything unique.
Carlos Wong-Fupuy, a senior director for AM Best, who spoke during an online briefing on Monday, referred to the fact that severe market dislocations, which the rating agency and other reinsurance market analysts and participants had braced for in December, didn’t quite materialize.
Despite the negative post-renewal commentary offered up by reinsurance brokers who said that some reinsurers challenged long-term relationships with cedents by failing to differentiate them—delivering prices hikes and tighter terms with a broad brush, the brokers ultimately landed in the same place as Wong-Fupuy.
“Despite headwinds, however, clients were able to purchase the reinsurance protection they need, securing core coverages albeit at significantly higher rates and retentions,” Aon said in its “Reinsurance Market Dynamics” report published in mid-January.
“We did place the limit. We negotiated contracts and we found a successful landing to move forward in many trading relationships,” commented Aon’s Global Growth Leader Joe Monaghan.
“In a renewal season that was extremely late, ultimately, placements were largely completed at client issued structures and pricing, without many of the requested modifications in coverage,” said Guy Carpenter in a late December report.
While there’s some disagreement in the two broker statements, both agree with Wong-Fupuy’s main point—one that was also presented simply in three words by another speaker at the briefing. “Things got done,” said Aditya Dutt, president of Aeolus Capital Management, ”
“It was a difficult renewal. Prices changed. Terms changed. Retention changed. But things got done. Transactions got done,” Dutt said. “I don’t think this is a case of half the market is short-falled or some meaningful percentage is short-falled.”
“Transactions did get completed, partially because both cedent and reinsurer had a meeting point—a realistic meeting point of what it takes to get a transaction done.”
Brokers commenting on why “things got done” highlighted their roles in readying their clients for tough negotiations. Guy Carpenter executives spoke about working with clients “to prepare for detailed, technical discussions and to strategize on multiple solutions in a shifting environment, finding pathways to achieve viable renewal outcomes”
“In challenging market conditions, well-informed insurers commenced renewals early and took a pragmatic approach, exploring a wide range of program options and structures, as well as protection solutions and capacity providers,” Aon said. “Despite a challenging market, insurers that were earlier to market and more advanced in delivering firm orders were in a better position to address gaps in capacity.”
Wong-Fupuy had a slightly different assessment. He suggested that cedents who had been lulled into a pattern of overusing reinsurance in recent years, moved in a healthy direction at 1/1/2023.
“How much of that [lack of dislocation] was because the primary sector was already prepared, [or] had been adjusting to that [possibility], we won’t know,” he said. “To a certain extent, what we’ve had in the past…was this excess of reinsurance capacity. It had to be deployed, and it probably was deployed on working layers [where it] shouldn’t have been. That should have been retained in the primary sector.
“The primary sector got used to that, and it probably shouldn’t have,” he suggested. “For a number of years now, what we have seen is a primary sector which has been doing better than the reinsurance sector in terms of profitability.”
“We are seeing that adjustment happening now. Obviously, if we have a primary sector which is excessively reliant on reinsurance, there are going to be some issues. I believe that the readjustment is actually something healthy for both the primary and the reinsurance sector,” he said.
“In general, despite a difficult backdrop, transactions did get completed,” said Dutt of Aeolus Capital, a property-cat reinsurance specialist. “I would say increased retentions by insurance companies was a big contributor getting transactions completed, certainly in the property-cat space,” he confirmed.
Moderator Anthony Diodato, an AM Best managing director, asked panelist Liz Cunningham, the chief executive officer of Somers Re, specifically about the chatter about “strained relationships,” as reinsurers tried to cull books of business and manage the risk while cedents looked to maintain past coverage levels.
Cunningham said, “The 1/1 renewal was definitely a long, hard, complex process, and it definitely went to the wire—to the 11th hour. But I think ultimately, most programs got placed [due to] a combination of innovation, understanding client needs, and being able to adapt and tweak the programs to get something that met everyone at the middle.”
“It certainly sharpened the focus on the importance of maintaining good long-term relationships throughout the cycle,” she continued. “It was definitely a provider’s market…The reinsurers got the rate increases while improving or holding terms and conditions.”
As reinsurers worked with cedents, the cedents “got to choose, in most cases, who they wanted to work with as well in this hard market….That shone a light on how important those relationships are.”
Agreeing with Dutt, she added, “At the end of the day, the job needed to get done and it did get done in most cases.”
Dutt responded as well. “In our industry, we tend to look at markets as zero-sum games—that it’s either a great market for reinsurer or it’s a bad market for reinsurer. And I don’t believe… it has to be that way,” he said, adding that he believes other market participants share the view. “We have two jobs: to service our cedents appropriately, and to earn an acceptable rate of return for our investors. I don’t think those are mutually exclusive,” he said.
“In fact, generally, if you do one well, you’ll do the other one well. But there are many aspects of negotiations that serve the relationship with a cedent. It’s speed of execution, it’s coverage, it’s financial strength, but also price and terms. And it shouldn’t be that being tough on price and terms negates all the other things.”
“I think the best reinsurers in the market serve their clients with the factors of those relationships, and don’t just focus on price and terms.”
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