Lloyd’s market message brings further indicator of a tough 1.1 ahead for cedants

One of the key takeaways from this year’s Rendez-Vous in Monte Carlo was just how challenging the next few months will be for many cedants and their reinsurance brokers as they look to place their 1.1 treaties.

A narrowing of property cat/all risks and quota share capacity has been compounded by inflationary impacts which mean most cedants will need to buy at least 10 percent more limit just to stand still.

With limited new entrants, and ILS capital seemingly not prepared to step in and make up the shortfall as it has done in previous years, there is increasing recognition among buyers of reinsurance that the next few months will be tough. It was telling that the Rendez-Vous saw little of the shadow boxing between reinsurers and brokers about the direction of rate travel – a stark contrast to previous years.

That message was further driven home yesterday as Lloyd’s chief of markets Patrick Tiernan announced he will be keeping a close watch on planned reinsurance purchasing as the Corporation assesses 2023 business plans.

“It is an inherent expectation that managing agents consider the feasibility of their planned reinsurance strategy with a reassessment of risk appetites, underwriting strategy and capital if placements differ to plan,” Tiernan said.

“We don’t expect you to have a crystal ball at this stage, but we do need you to be cognisant of current conditions and ensure that your 2023 business plans have thoughtful assumptions and sensible contingency arrangements,” he continued.

All syndicates have been asked to provide their assumptions around their average reinsurance rates, limits, retentions and availability of cover to “help evaluate underwriting plans”.

While eventual terms secured may differ from current projections, Tiernan urged managing agents “to show realism” to avoid the need to resubmit plans in Q1.

The challenge for cedants and their brokers is where to pitch these assumptions given the uncertainty. We know rates will be up, limits cut and perhaps terms tightened, but beyond that there is much to play for.

Perhaps one sign for optimism is the number of reinsurers that have indicated they will be maintaining or increasing their property cat appetite at 1.1, as highlighted by our Analysis this week.

And many of those cedants may also benefit from the upwards pricing pressure as sellers of reinsurance (to be fair, many also point out they don’t anticipate their PML aggregates increasing). However, the sense now is that capacity will be short rather than crunched. This implies programs may renew incomplete rather than unfinished while insurers may also look for other forms of solvency capital rather than just reinsurance.

Tiernan also said Lloyd’s will actively support those well-positioned syndicates looking to take advantage of these opportunities as sellers of property cat.

These dynamics make this the most compelling 1.1 renewal for several years. The Insurer will continue to track these dynamics in the run-up to 1 January. Look out for our continued extensive #ReinsuranceMonth coverage for the remainder of September, and our team will be on the ground for next month’s talks in Baden-Baden and APCIA.