After a prolonged softened market state, in which wordings became looser and coverage broadened, the reinsurance market is slowly grinding back to terms and conditions (T&Cs) that can be managed, according to industry experts.
Day three of Prospectus 2021 – a new annual re/insurance and insurance-linked securities (ILS) conference, kicked off with an exploration of T&Cs and the need for precision as the reinsurance industry approaches the key Jan 1st renewals amid continued market firming.
To start, Heather Kitson, Deputy Chief Executive Officer (CEO) of Convex Re, explained how in a soft market state when capacity is plentiful and outstrips demand, “reinsurers ability and indeed appetite to push back on loose wordings and broadening coverage is reduced, and this is particularly the case in a subscription market.”
She went on to note the historical over-reliance on computer models, which can often be inaccurate, and the focus on rate at renewal and premium through the door.
“The rates may have stayed the same on paper but there’s not necessarily a full appreciation, certainly on a portfolio basis, as to how coverage in the contract wordings may have expanded, and therefore reinsurance exposure may have increased,” explained Kitson.
According to Kitson, while having not seen major revolutionary changes in reinsurance wording over the last two decades, these wordings have been put to the test against a modern and changing risk landscape.
“The wordings have continued to evolve but not necessarily keep up with the modern world,” she said.
Adding: “Finally, what I would say on this matter is that the broker and the underwriter are there to ensure that the client’s needs are clearly articulated in the contract, and this hasn’t always happened in a soft market. There needs to be a continued, common sense market discipline around the quality and clarity of our wordings.”
Fellow panellist Michael Millette, Founder & Managing Partner, Hudson Structured Capital Management, highlighted the softening of the reinsurance market over a long, calm period, which ultimately brought in capital that urgently needed to be put to work, which caused terms to broaden out.
“It actually caused structures to develop in the market that really had been quite rare before. And there are reasons that they were rare, because they tend to be susceptible to misinterpretation,” said Millette.
“And, we are seeing the market grinding back. It’s very, very hard to reimpose terms and conditions discipline. And, we’re seeing that now, the market is slowly grinding back to terms and conditions that can actually be managed,” he continued.
According to Millette, the market softening started with Hurricane Wilma in 2005 and when Hurricane Harvey came into the Gulf Coast in 2017.
“In that softening and then ultimately soft market, we saw, first of all, the development of more retro capacity, more and more aggregate retro capacity. And then, finally, a lowering of attachment points.
“At the same time, we saw events start to gain in frequency, we saw post-event inflation start to increase, we saw climate change influence the accumulation of events, and we saw unmodelled perils like fire and flood, that formerly had been really much below the radar screen of the cat market, lift up into the cat market.
“So, those things have come together fairly catastrophically for the market over the past four years. The terms and conditions have placed, as well as attachment points, have placed the market right in the way of increasing event frequency.
“And, we’re going to have to pull back from that. We’ve seen some pullback, for example, on cascading, we’re going to need to see pullbacks on things like co-participation,” said Millette.
The day’s opening panel also featured James Parker, Chief Claims Officer, AXIS Re, who provided some insights into some of the more specific issues surrounding the broadening of T&Cs, such as the hours clause.
“I think what we’ve seen there (hours clause) has been an increase in general over this time period, certainly an average of the number of hours allowed per hours clause,” explained Parker.
“That probably culminated in what we saw in the Australian bushfires in late 2019, where probably most were already at 240 hours, and in some cases we even saw 672 hours. That’s particularly relevant, I think, picking up on the point just now in relation to wildfires, and the fact that they’ve gathered frequency and momentum in the last couple of years.”
Adding: “The second example I’ll give, again linking to bushfires, this time the relevance could be seen a bit more specifically in California, certainly in 2018, where we’ve seen over-time more of a move towards so called plot drops or radius clauses in treaties. Which, have had the effect way beyond probably just the hours clause, because they usually entitle a cedent to pick the spot where they drop the plot.”
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