Bermuda roundtable: Reinsurers’ discipline holds in strong trading environment with challenges

Leading executives suggested during a roundtable discussion held by The Insurer in association with Lloyds Bank that the discipline shown by reinsurers at mid-year renewals will be sustained heading into the next year, although the disconnect between insurance and reinsurance in property will become a larger issue and reserve increases in casualty are also causing concern.

The roundtable was held by this publication and Lloyds Bank at the Hamilton Princess in mid-June, between the key 1 June and 1 July mid-year renewal dates.

The speakers agreed that discipline is holding in the reinsurance market. They noted that casualty has come more into focus this year, with concerns growing around reserve adequacy, following property dominating conversations in 2023.

David Govrin, group president and chief underwriting officer at SiriusPoint, noted a shift in the property market in the run up to 1 June, however.

“Property started soft and got hard, which was interesting. The forecast for the year definitely spooked people in this market. So if there was going to be downward pressure, I think that forecast stopped any momentum that might have started,” Govrin said.

Kathleen Reardon, CEO of Hiscox Re & ILS, said that underwriting discipline remains strong in property, and there was not too much pressure on attachment points at the mid-year renewals. She said there was more equilibrium between supply and demand than at 1.1.

“To the extent that 1.1 US property was over-placed, most of that disappeared by mid-year. At least $7bn of new mid-year limit supported that, and some of the brokers are mentioning figures much higher than that,” she said.

In Florida, Reardon noted that the expiration of the state-backed RAP and FORA programs brought some new limit in.

She added: “That limit needed to find a home in the private market.

“Florida carriers and homeowners are beginning to see the positive impact of recent legislative changes, making the market more attractive. Also, carriers entering the private market tend to purchase more reinsurance protection than state-backed solutions, so this will likely lead to new demand.”

Allan Decleir, CFO at Fidelis Insurance Group, sounded a note of scepticism about some of the broker feedback on the renewals.

“I think one of the points is: don't necessarily believe the broker reports that you read,” he said. “While the reports may be true if you write the whole market, they certainly do not reflect what we see in the market. I think partly that is because it is a verticalised market. There are those who lead and those that follow, and people get different prices. We read those articles and we go, ‘Down? Really?’ It's just not the way we see it.”

Justin Keith, president and CEO for Bermuda at Ascot, said that property saw slight softening, more on terms rather than pricing “just in terms of SRCC and terrorism making their way back to some deals”.

On the non-property side, Keith said there is a continuing focus on prior-year development and how the industry plans on addressing that.

“We have observed that ceding commissions continue to come down, but not as much as we’d like to see in some cases,” he said. “Over the last couple of years some large reinsurers have acknowledged significant prior-year development and you can see they are struggling to come to terms with go-forward loss picks and how they address renewals. I think it’s appropriate that we as reinsurers remain diligent in risk selection, pricing, and reserving in order to stay ahead of loss trend, particularly in the broader casualty lines.”

Keith continued: “We are optimistic about the opportunities in the market and we still really like what we see on the underlying limit profiles and rate change. But there is still a lot of volatility and uncertainty in the world and we must continue to hold ourselves accountable in terms of getting the right return for the risks we are assuming.”

Mark Cloutier, CEO of Aspen, agreed with the general commentary on property and casualty lines. He also noted that in finpro lines “there was a fair amount of noise” around the contingency business in the M&A-related business.

“I think that is going to be challenging this year, and I think there's going to be an opportunity for reinsurers there,” he said. “I think that's going to probably be a challenged area of the market in the next coming 12 months.”

Cloutier elaborated that he was referring to issues around judgment preservation, and not reps and warranty business.

“It's more the contingent stuff, where somebody decides that they can protect a judgment,” he said. “The other one that's really surfacing with a bit of heat is the conservation easement – the tax plays in the United States are heating up quite a bit.”

Cloutier added: “People can't sit still. When M&A slowed, the contingent business around the traditional reps and warranties business started to expand sideways into some of these other areas. And I think there's a bit of a reckoning to come there.”

Looking ahead to the January renewals, speakers suggested that discipline will be maintained.

“If we look to the 1.1.25, which everyone's starting their business planning now, nothing's really changed,” Reardon said. “It's a healthy environment.”

The executive highlighted several challenges that should serve to maintain discipline including political elections, conflict, inflation, climate change, severe convective storms and potential cyber exposures.

“We need to keep moving forward, full steam ahead,” she said. “It is important that we sustain the current rates to continue to provide value for our clients as they navigate this complex risk environment.”

Property disconnect between insurers and reinsurers

Discussing the outlook for the property market, SiriusPoint’s Govrin said that it depends what business is being talked about, and cautioned the market is always one big loss away from disruption.

“I think there's going to be a lot more conversation about the difference between reinsurers’ performance in property and insurers’ performance in property,” he said. “You have this huge disconnect, especially in the US admitted insurance market, where companies just can't get enough rate. You see in California people taking action, pulling out, they can't get rate to charge the customers the right price for the product.”

In contrast, reinsurers can demand the pricing they think they need to make a return on capital.

“I think that gap is going to get talked about more and more while the reinsurers maintain discipline,” he said.

Govrin did note that the disconnect is not such a big problem in the E&S market because of the freedom of rate and form there.

Cloutier at Aspen suggested that, even in the E&S market, it is unclear whether enough rate has been secured.

“Everybody got really pretty excited about where the US E&S property was going last year in terms of rate and talking quite fondly of it. Given what we don't know about how climate is going to behave and particularly the severe convective storm element, I don't know how we know it’s enough,” he said.

Cloutier continued: “When we're looking at rate and we're saying, ‘Well, terrific, it's better than it has been for five years.’ Well, how does that relate to the level of activity, frequency and severity that's happening? I'm not sure it's kept up. To me there is no basis.”

Cloutier also suggested that the impact of social inflation on the property is not talked about enough. He added that while Florida has passed reforms, it is not clear how they will impact the market yet.

“So there's just no fundamental reason for the market to change direction, and if anything, we should be continuing to push for rate until we have a better understanding of the risk we’re onboarding,” he said.

SiriusPoint’s Govrin noted that reinsurers sell 12-month policies and can make annual decisions, but admitted carriers can take longer to adapt.

“Climate change is impacting people differently, but we can come to next year and make a different decision. The primaries don't have that luxury,” he said. “They have a little more of a luxury in the E&S space, but they don't have that luxury in the admitted space.”

When asked if there was a potential reputational risk for pushing rate on the property insurance side without an education or mitigation component to reduce the risk, Reardon from Hiscox replied affirmatively: “Along with our cedants, we have a role to play in helping to create more resilient end consumers, who are informed about how to mitigate risk.”

Responding to this, Aspen’s Cloutier said: “An interesting thing to your reputational risk point is we should be able to find, I'm going to use the word carefully here, a financing solution for that tranche of risk until we can figure out what the right price is, or maybe there isn't a price that can make it affordable to the consumer from a traditional product standpoint.

“Maybe we should be thinking about using our balance sheet to do some time and distance. And given all the political pressure and the fact that the issue is emerging and it's very real, maybe some of those inventive things we used to do aren't such bad ideas after all, when they're applied to the circumstance today, if somebody's brave enough to bring those thoughts forward to help manage the risk in that gap in that tranche.”

James Ferris, CEO of BMS Risk & Advisory Bermuda, noted that insurers are increasingly investigating setting up captives in response to the gap between them and reinsurers.

“We've had so many queries on that topic,” he said. “I think it’s an interesting solution while they're trying to figure out how to get an acceptable price.”

Casualty uncomfortable but no crisis looming

Discussing the outlook for the casualty market, Ascot’s Keith noted the reserve strengthening for some companies in recent earnings releases.

“We don't expect that to stop really,” he said. “When you think about just how profound the limit deployed was – the $25mn, $50mn limits being deployed when rates were depressed – you would expect there to be more pain to come.

“We've seen adverse development on the primary side or on the insurance side. But we haven't seen it as much coming through from reinsurers. And that's kind of troubling for me.”

The roundtable took place shortly after TransRe CEO Ken Brandt had commented at an S&P Global ratings insurance conference that casualty could cause "a liability crisis” in reinsurance in the next couple of years, noting that the losses coming were "pretty stunning" and "much higher than our worst-case scenarios" with "a lot more coming down the pipeline".

When asked about these comments, the panellists were less concerned.

“Crisis? I don't think so,” said Cloutier. “I think it’s hard to know what's really going on right now. Everybody is enjoying in a lot of lines of business what we think are reasonable trading conditions. And so are people using the current trading environment to help outrun the soft part of the cycle years?

“I think a crisis would be contingent upon a sudden turn in the market where the ability to conceivably sustain that could be lost. I just don't see anything in the fundamentals of business that suggests that we should see a turn in the rate environment in the foreseeable future. There’s enough fear out there right now.”

Cloutier added that the casualty market could turn “if a couple of the big players decided to start throwing around the huge lines again and go for market share” but that these players have been vocal about maintaining discipline.

“Typically, the harbinger of bad behaviour is when you start to see the line expansion, and we're just not seeing it,” he said. “People are holding their line on their limits profiles pretty firmly. So I think that signals some stability.”

Ascot’s Keith commented that it is hard to see a liability crisis looming.

“I think the fundamentals of the business are good and that will keep capacity available, but at a price. The fear is real, though, too, and that’s obviously what is staving off limit expansion and propelling the rate increases. What defines rate adequacy can be tougher to nail down – and there will be winners and losers in this regard over the coming years”

Reardon commented that the casualty environment “feels uncomfortable”, and that the jury system needs to be fixed.

“It does not make sense. The nuclear verdicts are not sustainable,” she said.