April renewal: More orderly 1.4 outcomes stem from aligned market expectations

Japan P&C renewal continued hard market momentum, with signing lines mostly arriving by March 31.

Following one of the toughest and most gruelling January reinsurance renewals for decades, 1.4 provided calmer waters thanks to more orderly renewals driven by the Japanese P&C market. Swiss Re's Gianfranco Lot, Chief Underwriting Officer P&C Reinsurance, outlines some of the key points including the improved alignment of expectations.

Japan is by far the biggest market that renewed at 1.4, although there are a smaller number of treaties renewing in India and for several of our international clients. Overall, client and reinsurer expectations were better aligned than at 1 January, leading to a more orderly renewal process.

While 1.1 was quite uncertain, 1.4 was much more methodical. Market and economic conditions and dynamics didn’t change dramatically from 1.1, so the process was much more measured. Pricing momentum continued, as did higher retentions and tighter terms and conditions, with changes in relation to structures and wordings. This was particularly evident around areas such as infectious diseases, Non-Damage Business Interruption and loss occurrence definitions.

There are two key reasons for this more orderly outcome. First, the 1.1 renewal enabled clients to anticipate rate increases and so they were therefore able to prepare and adjust their budgets accordingly. Second, the use of retrocessions enabled reinsurers to calculate capital supply more accurately while remaining conscious of required (higher) returns. In this sense, expectations were better managed by all parties for the 1.4 than the 1.1 renewals.

1.4 is also a significant renewal date for specialty business, such as agriculture, aviation, credit and surety, cyber, engineering, and marine lines. Two observations I'd like to highlight. Firstly, in Marine, we still see a need to further clarify war coverages following the outbreak of the Ukraine war in 2022. We have seen more proactive monitoring and management of war exposures, as well as improved transparency and data sharing between insurers and reinsurers, alongside further alignment on coverages. Secondly, discussions around sideways limitations on proportional treaties for aviation business have progressed and we see more and more markets subscribing to that approach.

Understandably, there was a level of pushback from clients and broker partners, especially in Japan, where reinsurance rates had already been adjusted because of four typhoons that hit in 2018 and 2019. However, the global increase in the risk frequency and severity trend of Natural Catastrophe events had to be considered.

The South African flood loss that hit KwaZulu-Natal in April 2022 was a point in case. Here the floods caused widespread devastation as well as severely damaging Toyota's prospection plant in eThekwini causing billions of Rand in damage. Further, where medical reimbursement covers from Covid-19 had been underestimated by the reinsurance market, a further costing and pricing review was triggered. These formed key discussions alongside NatCat risk exposures, which is always a big area of discussion.

Good progress was achieved in relation to data transparency, which is an issue across the entire re/insurance value chain globally. Many clients were able to provide more granular data points than before that enabled our own underwriters to better understand risks and price them accordingly. Brokers were also helpful in facilitating discussions with clients and ensuring expectations were aligned. However, clients equally saw the 1.4 renewal as a continuation of necessary changes for the market.

Collaboration with our clients was excellent and, in many areas, moved beyond just price and capacity discussions. For example, many clients have actively engaged with us in providing new perspectives and insights to assist with their underwriting efforts as well as providing large loss statistics and detailed modelling insights.

Most clients were primarily focused on the renewals and getting capacity in place at a reasonable price, making additional services a secondary point of interest, but we were able to deliver some value-add solutions and services for clients.

I hope we can expand on this moving forward. Clients advised that they appreciated exchanging with our own teams, especially regarding their portfolio performance, modelling insights and loss statistics. These conversations were very collaborative and helpful for our client's underwriting teams.

With 1.7 focused on the US and Australia, there’s likely to be more demand. In this sense I expect a continuation of the current market momentum.

Walking into the conference season, I am anticipating discussion around the increasing frequency of NatCat events and secondary perils. We’ve witnessed the earthquakes in Turkey and Syria, tropical cyclone Gabriel, several tornadoes, and floods in New Zealand too. So that seems to be elevated, at least from a first quarter perspective. It’s hard to say how that will change, but by the half year point we will have more data points.

We also see issues in the casualty market. Some of the court verdicts we are seeing are still significant, the Swiss Re Institute reported that in the US the median size of large awards rose by 26% for general liability cases and by 32% for vehicle negligence cases over the past 10+ years. This will inform renewal conversations on casualty business with our clients who have seen the same development and have managed their portfolios accordingly.

Looking ahead, we expect conversations to be more about the continuation of momentum on pricing, conditions and reinsurance structures However, it's still early and we'll need to consider what happens at 1.7 and also specific topics like cyber, inflation and weather-related events.

At present we’re focused on serving our clients in the best way we can, being a consistent and reliable partner.