Baden-Baden 2019 Day 1

Insight and Intelligence on the European and International (Re)insurance Markets 20 OCTOBER 2019 SUNDAY BADEN-BADEN Reinsurers brace for squeezed returns as retro costs set to bite uropean property catastrophe Reinsurance underwriters added that Etreaty reinsurers fear a second year Key points the trend seen in the US and Japan of of squeezed returns as they face being increasingly specific pricing, with rate caught between flat inwards pricing c European loss experience has been increases strongly tied to loss-affected and steepening retrocession costs at benign and globally 2019 does not regions, risks or individual clients, is the 1 January renewal. look to have been an above-average increasingly evident within Europe. Insurers on the continent have experienced cat year Even European cedants with some losses another relatively benign year for cat events. c Hagibis, Faxai and Dorian will put are likely to argue that they have paid Globally, despite creep on Typhoon Jebi some pressure on retro capital, enough in premiums in loss-free years to losses in the first half, as well as Hurricane driving up prices justify a flat renewal rate this year, sources Dorian and typhoons Faxai and Hagibis, c Increasing retro costs plus said. 2019 does not yet appear to be an above- anticipated flat European property Reinsurers, on the other hand, are arguing average cat loss year. cat treaty rates will squeeze for increases after a decade-long downward This 2019 loss record, coupled with a long reinsurers’ returns trend in European property cat treaty benign period for cat claims in Europe and c Some cedants are starting rates which has left pricing at levels many a continued abundance of capacity, means negotiations early in a bid to lock in consider unsustainable. that reinsurers have little expectation of low prices Underwriters have been warning for some securing anything better than a flat renewal years that pricing on European property at 1 January. losses this year, but none have been big treaty has been below technical adequacy. At the same time, however, those enough have a broad-based positive impact The run of large wind losses in Japan in same losses – following a period of on pricing. 2018 and now potentially 2019 is seen as a underperformance in the ILS market – look Storm Eberhard, which struck Germany cautionary tale about how reinsurers writing set to cause a contraction of retrocession in March, resulted in a $1.1bn insured technically under-priced business in good capital that will force reinsurers’ costs higher. loss according to an Aon estimate, while years find this ultimately catches up with Early reads on the European windstorm hailstorms and severe weather that hit them when loss activity returns. renewal from market sources suggest it will Munich and parts of Poland, Slovenia, Czech be stable and orderly, with little change Republic and Italy in June brought $722mn The case for rate increases to demand, supply, pricing or terms and in insured losses. Reinsurance sources pointed to global conditions. Sources said that where these and cat activity and their increasing cost other incidents did become reinsurance of capital to justify arguments for rate Loss activity events, they only touched the first layers increases in Europe. Europe was not entirely without notable of cedants’ protection. CONTINUED ON PAGE 04 03 Channel Syndicate 05 Cyber XoL demand grows 08 Interview: GC’s seeks RITC deal amid aggregation concerns Massimo Reina INSIDE 04 Allianz to add £500mn 06 Brexit uncertainties for 15 Profile: Axa XL’s UK reinsurance cover European reinsurers Bertrand Romagne Turning Risk Into Success Baden-Baden 2019 Day 1.indb 1 18/10/2019 16:41 RR_InsInsiderAD_BadenDallies_Sept19Partner279x215.inddBaden-Baden 2019 Day 1.indb 2 1 09/09/201918/10/2019 4:25 16:41 PM COMMENT Reinsurance 2025: The squeezed middle ewind to 2014. Cat reinsurance rates Arguably, it is insurance pricing for large, a global footprint, all-line expertise and Rwere in freefall, casualty ceding complex, specialty risk that overshot more major capacity. commissions were soaring. clearly on the downside than reinsurance. And these companies are clearly highly Reinsurance was becoming a single-digit The biggest carrier stories of the past 12 expansive, with Swiss Re (+30 percent), return game driven by structural changes months have been the remediation of AIG’s Hannover (+20 percent) and Scor (+12 around its capital base. book and the tactical and strategic efforts to percent), showing they had major appetite The likes of Zurich, AIG and Liberty were reconstruct Lloyd’s. to grow with even relatively limited upward progressively retaining more risk at the Questions about industry structure and rate momentum in Q2. expense of reinsurers as they looked to the reinsurance sector that felt urgent back The question then becomes two-fold. leverage their monster balance sheets. in 2014 may no longer be top of mind, but First, will we see the development of a new PartnerRe’s board decided to quietly put I think they remain highly pertinent. And generation of truly low-cost reinsurers that the business up for sale after judging that there is a question currently exercising the act as almost pure capacity providers? it would be too expensive to build or buy minds of managing agency CEOs that has Such companies would need to find ways an insurance business, which was mission interesting parallels for the reinsurance to satisfy regulators and ratings agencies critical for future success as a carrier. market. that they had sufficient oversight in place The Bermudian reinsurer’s judgement of With excessive expense a huge issue within (perhaps harder to achieve outside the its prospects was so bearish that it decided Lloyd’s, the Corporation has indicated as part Lloyd’s ecosystem), while convincing that a sale to Axis, which would value one of Blueprint One that it will look to create investors they could make a return and of the leading reinsurance franchises in the a greater distinction between leaders and create franchise value. world at less than book value, was a better followers. None of that is a mean feat, but it could outcome than an independent future. Leadership – which is likely to be perhaps be done with enough ingenuity. At this point the focus of the reinsurance officially accredited – will require product, And second, if they could establish world was directed towards model shift, as underwriting and servicing capabilities. themselves – or if some existing reinsurers scale was pursued through consolidation, But the following market will be given evolved in this direction – would the middle diversification was used to secure additional the freedom to operate as true capacity tier of reinsurers be able to successfully financial leverage, and fee income and providers, exempted from the need to compete against the full-service leaders and additional market presence was sought employ expensive staff to carry out work the ultra-low-cost followers? through the development of third-party that duplicates the efforts of the leader. One suspects that in such a scenario, the capital platforms. If the model works as intended, flexible middleweights would find the squeeze far Questions were asked about whether structures will be developed that allow from comfortable. the potential of the ILS industry and its capital to follow expertise, with significant appetite for even volatile risk at mid-single cost benefits accruing to the market. digit returns meant the days of writing cat Over the next five years, the Lloyd’s market reinsurance on your own balance sheet looks set to bifurcate dramatically as a result. might be over. Could the same thing happen within the Adam McNestrie, But since those dark days, the industry’s reinsurance market? Editor-in-Chief, attention has moved on, and the real Arguably, the leaders have already The Insurance Insider problems have emerged elsewhere. established themselves, with a push towards [email protected] Scor’s Channel Syndicate seeks RITC transaction cor-owned Lloyd’s business Channel Arch-backed legacy carrier Premia has “We confirm that we are investigating SSyndicate 2015 has approached the provided new competition in the RITC space a reinsurance to close for our 2017 and legacy market as it looks to secure a and will be keen to strike its first third-party prior years of account. This will enable us reinsurance-to-close (RITC) transaction, deal, having recently acquired the Standard to redeploy capital into our focus classes, The Insurance Insider understands. Syndicate and Charles Taylor’s managing namely cyber, political and credit risk, It is understood that Channel is using a agency to provide it with a Lloyd’s platform. environmental impairment liability, fine art broker to advise on the deal, which would RiverStone and Randall & Quilter are also and specialist areas within property.” address the liabilities for the 2017 and prior active, while Berkshire Hathaway has been Channel Syndicate 2015 has struggled years of account. largely dormant for years. with profitability since its inception in The RITC market at Lloyd’s is highly Stuart McMurdo, CEO of Scor’s specialty 2011, as it attempted to build critical concentrated and there are only a handful of insurance operations for Europe, Middle mass in a poor pricing environment. It has players which would be in a position to take East and Africa, confirmed the RITC process recently undertaken a number of remedial on the transaction. They include Enstar’s RITC to this publication in a statement and said: measures to address underperformance, syndicate Shelbourne, which dominates the “Our strategy centres around delivering including exiting general and professional market and is believed to have more than enhanced, consistent and sustainable profit liability, accident and health, hull and cargo £3bn ($3.3bn) of reserves.

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