Casualty reinsurer resistance expected to stiffen at 1.1

The blunting of upward momentum on ceding commissions for long-tail lines pro rata deals that began in the first half of 2022 is expected to continue at 1 January, according to a number of (re)insurance executives.

Industry leaders pointed to falling underlying rate increases, higher inflationary pressures and increasing adverse development on recent accident years as drivers for the shift in sentiment in the segment.

The turning of market conditions comes after a well-documented and historic rise in commission levels over the last two years, with cedants and their reinsurance brokers aggressively pushing up commissions anywhere between 1 and 4 points at recent renewals.

That came in response to the perception that underlying portfolio profitability market-wide had been significantly strengthened by consistent double-digit rate increases in both the professional lines and casualty markets.

Accordingly, many market sources have cited the benchmark commission level for reasonably well-performing portfolios rising to just below the mid-30s, while in some cases buyers have been able to appreciably increase commission levels as early as the first renewal for some start-up portfolios.

Up until recently, reinsurers have accommodated the strong increases in commissions, as they have aggressively bid on attractive long-tail business while they have soured on other lines, most notably property catastrophe.

Reinsurance brokers have also been able to successfully leverage heightened demand for the long-tail lines treaties in order to complete more challenging deals, such as property placements and even cyber.

That has occurred even as reinsurance buyers have scaled back their pro rata cessions significantly, taking a much greater proportion of the attractive long-tail lines business net, while also in some cases pushing reinsurers to write thinly priced excess of loss covers in order to maintain or grow their line on the casualty or professional lines deals.

Early signs of growing resistance to rising commissions for long-tail lines deals was seen at the spring renewals, with a number of Axa XL’s professional liability treaties renewing at flat cedes, and, perhaps most notably, Allied World cutting the cession on its combined professional liability and cyber deal after increasing the commission by 2 points to 34.5 percent.

In another sign of the bearish outlook among buyers, some cedants and their brokers offered reinsurers the option of writing deals on a two-year basis at a modestly lower commission, a clear indication those cedants expected the economics on those placements to shift in the year ahead.

Gallagher Re confirmed many of those trends in its 1 July 1st View renewal report, which showed US casualty pro rata commission increases slowing to between 0 and 1 percent, US motor liability commissions generally falling by 0.5 percent and US healthcare commissions ranging between 1 point reductions and 1 point increases.

More delicate negotiations expected

In contrast to the prior two years – when an increasing volume of submissions were sent out with firm order terms where reinsurers weren’t even asked to quote – broking and underwriting executives expect a return to a more delicate negotiating environment, with more substantial discussions needed to come to terms on views of risk.

Those conversations will once again centre around the standard themes that have defined virtually every renewal period in the past, such as developing a shared understanding on loss cost inflation compared with underlying rate expectations.

Headwinds buyers are facing include a downward shift in underlying price increases and a pick-up in loss cost trends, highlighted both by the historic levels of economic inflation and the ongoing uptick in social inflation, as well as the re-opening of the court system after case activity slowed during the pandemic.

During the recent earnings period, executives spoke broadly about a significant reversal in D&O pricing, a trend that was confirmed by the latest instalment of Aon’s D&O pricing index, which showed that average rates for public D&O fell by nearly 15 percent.

That report confirms commentary by reinsurance underwriting executives, who spoke this spring about a number of portfolios – in the management liability segment in particular – failing to meet rate increase projections that were provided at the prior renewal.

“I would bet most treaties miss their rate change estimate,” one executive commented. “People in public excess D&O are saying it’s a bloodbath,” they continued, adding that price changes in the segment moved from 30 percent increases to 15 percent decreases practically overnight.

The shifting pricing dynamics also come as a number of carriers reported a deterioration on prior accident years in their financial lines portfolios during the most recent earnings period.

Markel recorded adverse development in its professional liability book for accident years 2015-2019 during the second quarter, while Argo reported an $8mn reserve charge in its international operations that it said largely came from its professional liability book out of Bermuda, and had been offset by favourable development elsewhere.

Brokers highlight reinsurer concerns

Reinsurance brokers have begun to acknowledge the growing concerns of reinsurers in the casualty arena, despite the strong appetite that remains for the business relative to property cat.

Speaking last week at a pre-Monte Carlo briefing, Guy Carpenter’s managing director of global casualty Carolyn Morley said the casualty sector is also facing societal and market challenges, leading to more emphasis on individual account dynamics. “Reinsurers are increasingly concerned with external economic and political factors and the resulting heightened volatility applying to both short- and long-tail lines.”

She added that at 1 January, strategic trading relationships will continue to carry significant weight, as the interest rate environment, Russia-Ukraine conflict and inflationary recession concerns top the agenda in renewal discussions.

“Overall, casualty capacity is expected to remain adequate although some pricing pressure is anticipated depending on the line and capital requirements. Cedents who proactively highlight their limits management, portfolio actions and policy changes will be strongly positioned for successful renewal outcomes,” she added.

Meanwhile, Aon said cedants should prepare for probing discussions on key areas of underwriting concerns like inflation, rate change and emerging risks, with transparency and data quality important differentiators.

“Clear communication will be key to securing the best terms and conditions.”

Key renewal themes

Among the key renewal themes executives will be watching for is whether cedants reverse the increased net positions taken at recent renewals, in a bid to ward off downward pressure on commissions.

Efforts by intermediaries to squeeze reinsurers over the last two years have been particularly stinging in some cases, especially where cessions were dramatically cut back.

Executives pointed to several key autumn renewals as potential bellwethers for sentiment heading towards 1 January, citing The Hartford’s 1 October casualty renewal covering its Navigators book – which is believed to have a 34 percent expiring commission – and CNA’s 1 December D&O placement.

The CNA deal is placed by Guy Carpenter, while The Hartford deal, which is placed alongside an excess of loss cover, is co-brokered by Guy Carpenter and Gallagher Re.