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RenRe’s O’Keefe and Marra on the 1.1 renewals

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As negotiations begin to pick up heading into January reinsurance renewals, a clear contrast has emerged among executives between the profitability and availability of capacity across the property and casualty markets.

It has become increasingly well-established that the property market - particularly for the proportional and retrocessional covers that have been most heavily impacted by higher cat activity - will be much more challenged than the casualty market, where underlying profitability improvement has in many cases led to ample capacity.

Speaking on the latest installment of Inside P&C’s Unreserved podcast, RenaissanceRe’s chief underwriting officers for property and casualty/specialty Justin O’Keefe and David Marra reinforced this view, expressing the belief that the property renewal would be more turbulent than in casualty.

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1. Casualty renewals ‘stable’ vs a year ago

In casualty, in contrast to last year when the industry was still coming to grips with the fallout of the pandemic and accelerating underlying rate environment, Marra characterized the early tenor of renewals as “stable”, with much more clarity on the part of brokers and underwriters on what to expect.

Last year, executives described the market in the earlier parts of the renewal as much more tentative, with brokers challenged to give clients clear price guidance, before it became apparent there was much more reinsurance capacity on the table at attractive pricing than had been expected.

Since then, brokers have become more aggressive on pricing, with some reinsurance executives acknowledging the upward pressure on commissions, as a trade off for more profitable underlying business.

“The challenge for a reinsurer was to get our heads around view of risk, make sure we understood what was coming in from Covid, and then figure out the best way to grow into an improving market,” Marra said. “And we did a really good job with that.”

RenRe is among a cohort of major incumbent reinsurers that have been adding significant volumes of casualty reinsurance premiums in the past year. The company has grown its casualty/specialty segment by 35% through nine months in 2021, having added $767mn in new gross writings.

That market orientation towards growth has led to less differentiation of cedants among reinsurers that have shown an expansive appetite for increasingly profitable proportional business.

“That supply-demand dynamic is pushing ceding commissions up a bit,” Marra said (see graphic below on January 1, 2020 rates). “It's the lack of differentiation, which I think might be what makes it troubling once margins begin to compress and the cycle starts to go the other way.”

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Marra said that while there have been more instances of cedants cutting back quota shares and exploring excess of loss, RenRe’s CUO for casualty/specialty said the phenomenon was “not taking over”.

To that end, he argued that clients were still favoring proportional structures for their ability to cover attritional, catastrophic, and systemic losses, while also being immediately financially accretive.

2. Property quota share, retro renewals expected to be ‘challenging’

In contrast to the casualty market, property CUO O’Keefe expects his market to be much more challenging, citing a variety of dynamics causing cedants, brokers and underwriters alike to reassess their views of risk.

“The key theme right now is certainly profitability, and it's not just the last year, it's really looking from 2017 through now,” he said. The executive cited climate change, inflationary trends, and the lack of face-to-face discussions as all introducing complexity around getting deals done.

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In contrast to the casualty/specialty market, O’Keefe expects about as much differentiation in the property market this renewal as ever.

“We live in a syndicated marketplace in reinsurance that has concurrency of terms, which to be honest, I've always thought is archaic,” O’Keefe said. He noted the extensive non-concurrencies in the North American excess property market, where the number of transactions dwarfs that of the treaty market.

“I would expect going into the more uncertain pricing environment of ‘22, we'll see more non-concurrent terms and conditions in the market as some programs will have challenges.”

O’Keefe flagged his expectation that the retro market was in for the toughest renewal of any of the property segments, saying he expected the renewal to be “very challenged.”

That market has been “hit in a lot of ways”, he said, as he referenced investor concerns over climate change-driven loss inflation and diverging views of modeled risk. As the supply of retro diminishes, reinsurers are more likely to offer reinsurance capacity to primary clients versus competing reinsurers.

The executive also expects the quota share market to be pressured to make structural changes, whether through a variety of exposure caps or cuts to ceding commissions.

On whether brokers would look to increasingly leverage more attractive casualty deals against the more difficult property deals, Marra said “I don’t think we’re there yet”, but went on to explain that the reinsurer had grown its casualty/specialty book from $100mn in premium 2008 to a point where it now rivals its property portfolio.

“We've been building that casualty and specialty side to really establish the market leadership position that we're able to demonstrate post-pandemic and grow to the scale we are now in that we're really happy with that contribution to the overall top line and bottom line.”

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Investors, he added, didn’t always understand the investment income contribution the casualty and specialty segment made to earnings, though he expected underwriting income in the segment to increase moving forward.

3. RenRe aims to ‘underwrite around’ inflationary pressures

Despite a surge in inflationary pressures in recent months, Marra seemed sanguine about its effects complicating reinsurers’ ambitions to grow.

The executive expressed confidence in his firm’s ability to “underwrite around it”, while also noting that the worst effects of social inflation have been felt where personal injury claims are at play, such as general liability and auto liability, as opposed to financial and professional lines.

“Our view is to support the best underwriters who are the most capable of navigating this [environment] through claims, expertise, [and] risk selection,” he said. He added that the compounded rate increases of recent years also “help a lot”.

On the property side, O’Keefe put the combined cost increase of materials and labor year-over-year at 17%.

“At the end of the day, that just needs to get baked into the pricing of a property reinsurance product, if that product is there to respond for remodeling, rebuilding.”

O’Keefe said the topic was dominating the property January renewal discussions, and has welcomed the fact that clients and brokers have been raising the topic proactively.

“Our clients are seeing in their data that they're settling a lot more claims, and they are certainly…a lot closer to the business than we are as a reinsurer,” he said.

O’Keefe added that regulatory and political dynamics represented an additional complicating factor contributing to inflationary pressures, referencing not only the legal environment in Florida, but also the failure of the power supply in Texas in the aftermath of Winter Storm Uri.

4. Cyber risk a ‘good difficulty because there’s opportunity’

Both in the underlying and reinsurance markets alike, the rising threat of cyber has captured significant industry attention, where rates have continued to spike and underwriters to curtail capacity. Last week, the CEO of Hudson Insurance said the difficulty in being able to accurately model catastrophic cyber risk had put the market in “uncharted territory”.

Questioned on whether the cyber reinsurance market qualified as “difficult”, Marra said: “It's a good difficulty to have because there's opportunity, but it will be difficult to navigate and pick through the opportunities there.”

Marra compared the ongoing adjustment to the cyber (re)insurance market to that of the casualty market in recent years, saying that underwriters were still responding to the significant uptick in ransomware claims frequency and severity through underwriting actions.

Among the challenges in underwriting cyber for reinsurers is the supply and demand imbalance in the primary market, the high-profile nature of losses, and the uncertainty of cyber PMLs, Marra noted.

[Cyber deals will] be difficult to navigate, but with a good upside once we figure it out.

The executive also explained that cyber is “one of the few areas” in the reinsurance market where capacity is tightening, but that most deals include caps to exposure that allow reinsurers to protect their downside.

“It's a tough one to navigate on short notice,” he commented. “I think the market will grow and find a nice equilibrium, but the next year or two there will be a lot of uncertainty.”

“Market leaders will find a way to underwrite very profitable cyber portfolios in the future, but they're still going through that re underwriting process and figuring that out.”

Marra added that RenRe was “open for business” when it comes to cyber deals: “They'll be difficult to navigate, but with a good upside once we figure it out.”

Marra said that RenRe has been able to write more deals by increasingly leveraging the reinsurer’s third-party capital vehicles, which help the firm manage its aggregate exposure, while diversifying the exposure underwritten through its managed vehicles.

“As we go through those renewals will have a particular focus on making sure that we have the right cost of capital and the right profit margin in treaties that have [cyber] embedded inside.”

Those vehicles have allowed Ren to take larger lines for “shorter-tail” risks beyond property, with the executive citing the specialty classes of cyber, marine, and energy in particular.

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