Gallagher Re’s Vickers: Inflation “a pressure point” in overall stable Japanese renewals

Low catastrophe activity in Japan in recent months stymied rate rises for reinsurers in the region at the 1 April renewals, Gallagher Re’s international chairman James Vickers told The Insurer TV, but the effects of inflation continue to impact dynamics.

In an interview coinciding with the publication of the latest 1st View April reinsurance renewals report published today by Gallagher Re, Vickers said the most recent Japanese renewals, which dominate the 1.4 renewal season, were met by small rate movements, but “not as much as reinsurers were hoping”.

On a risk-adjusted basis, loss-free property catastrophe treaty rates showed modest single-digit increases similar to those seen at the 1 January 2022 renewals.

Property per risk business showed a far wider range of rate increases following the trend seen in other recent renewals. Casualty rates were flat.

Speaking to The Insurer TV in the latest Close Quarter episode, Vickers equated the Japanese renewals to the pattern seen at the most recent 1 January renewals.

“It was an orderly and stable renewal, which is also a reflection largely of the Japanese market and the way that it works, but also the way that there have been long-term consistent buyers of reinsurance,” Vickers said.

Reflecting on the rate rises, Vickers pointed out the lack of major catastrophe losses in the region made it difficult to justify significant rate increases.

But Japanese windstorm programs have been undergoing substantial re-rating since 2017, when some large claims occurred.

“Off the back of that, whilst it’s true reinsurers would still like larger rate increases, the rate increases have been relatively modest and in line with what we saw for loss-free renewals in Europe – a couple of percent risk-adjusted increases,” Vickers added.

“Although to be fair, those are risk-adjusted increases, so if we look at it in terms of the underlying growth of the portfolios in monetary terms, that’s a slightly bigger increase.”

The 1st View April reinsurance renewals report validated analysis by The Insurer on quota share arrangements earlier this week.

Earthquake quota shares have come under pressure for reinsurers of the big three Japanese carriers at the 1 April renewals, with some cedants successfully pushing up ceding commission by a point or two.

In the ILS markets, collateralised reinsurance and sidecars remained relatively stagnant, according to the report.

In contrast, cat bonds during Q1 2022 built on record-setting issuance last year. Weighted average risk premiums for US wind-exposed risks, for example, were up by 0.2 points to 6.7 percent, in line with a rise in expected loss to 3 percent.

Inflation issues

But Vickers flagged the “huge emphasis” being placed on inflation.

Vickers noted it was “the biggest concern” in the Japanese renewals, affecting conversations across all lines of business and all renewals.

Even though Japan’s inflation rate is much lower than in other countries, this topic was “undeniably a pressure point” for reinsurers in the region, he added.

Looking ahead at the forthcoming mid-year renewals, Vickers also mentioned inflation would determine the order of the individual discussions.

“For companies with stable portfolios, and particularly those who have a well articulated explanation to their reinsurers of what they’re doing in their original underwriting as regards inflation, I think they can look forward to a fairly stable renewal,” Vickers said.