CEO roundtable: Interest grows in structured solutions to address increased retentions and capacity deployment

A major theme at this year’s Rendez-Vous has been the impact of record severe convective storms and other attritional losses on insurers that have been forced to increase retentions, with no sign of any relief from reinsurers determined not to cede hard-won ground on attachment points.

And in response, insurers are showing increased interest in structured reinsurance and other solutions such as net quota shares, as well as aggregate covers modified to better align between cedants and reinsurers, according to senior industry executives in Monte Carlo.

Speaking on the Deloitte CEO Roundtable moderated by The Insurer on Tuesday morning, Guy Carpenter’s chairman of global capital solutions, international Vicky Carter noted that many buyers were required to carry higher retentions this year, while aggregate covers were very difficult to purchase.

“In addition, capacity was targeting higher program levels, which resulted in shortfalls at the lower end of programs. Looking ahead, we will see some buyers increase retention levels and buy less reinsurance, as they look to achieve the most efficient use of capital; and you’ll see others who look to purchase more vertical cover,” said the executive.

As previously reported, higher retentions came as reinsurers pushed hard on pricing, terms and conditions, and structure at renewals.

That left insurers more exposed to frequency losses in 2023 – a position which coincided with a high level of severe thunderstorm activity in the US, among other losses.

Carter said that the market will need more creative solutions.

“We’ve seen in 2023 a number of losses around the world, many of which were retained losses. I think you will see a lot more interest in developing innovative solutions at the lower end of programs, whether that comes in the form of structured reinsurance or spread loss covers.

“There will be a need for more holistic strategies as we move towards 1.1, designed to achieve enhanced capital efficiency and improved capital optimisation,” she continued.

The Guy Carpenter executive added that a lot of companies will look to optimise their balance sheets and explore options such as loss portfolio transfers in the context of their reserving strategies.

“I think that there will be a greater focus on balancing the balance sheet. We have seen a lot more markets come back into the structured space, and as a result there’s a lot more capacity available now for these types of solutions,” she concluded.

Sources at the Rendez-Vous over the last couple of days have highlighted a number of solutions that are being discussed, depending on the needs of the cedant and the pressure they face.

They include net quota shares, variants of drop-down coverage that can lower the retention during the year, and a range of aggregate solutions structured to better align the interests between buyer and seller than has been seen in recent years on sideways covers.

Discussions are also focusing on other ways of optimising balance sheets, including freeing up capital through reserve transactions such as loss portfolio transfers.

Meanwhile, reinsurer appetite has been growing for structured reinsurance – an area where Hannover Re has been a major player in recent years.

Also speaking on the roundtable discussion, the German reinsurer’s member of the executive board for P&C Michael Pickel said: “I think there is no one size fits all. But I think now with the capital needs and the increased retentions, we have lots of opportunities to optimise balance sheets with structured reinsurance products.”

And the Hannover Re executive added that the company has seen “many more requests” in the last year, and even at Monte Carlo there have been preliminary talks on the subject.

“In essence, when we increased retentions there's much more demand to come, and in order to tackle the frequency because the traditional aggregates contracts are going out of fashion,” he said.

As a buyer and seller of reinsurance, Liberty Mutual Insurance’s president of underwriting for Global Risk Solutions Matthew Moore argued that the increase in retentions doesn’t represent a zero sum game where it’s a win for the reinsurer and a loss for the insurer.

“It actually made the market more rational because it said at certain attachment points for certain perils we’ve just got to get that price right; we need that discipline.

“I think in the aggregate that’s actually served our industry well – both insurance and reinsurance. However, it does pose a medium-term problem which is ultimately whether reinsurance is only there as balance sheet support,” he said.

Moore described reinsurance as a “very effective capital mechanism” with strong relationships between cedant and reinsurer, but he noted that there are other mechanisms to support balance sheets as he asked whether from a customer perspective capital protection alone is a robust enough proposition.

“I think we'll have to get creative for those elements that are more than just balance sheet support to come back into the conversation,” he commented.

Providing an insurer’s perspective, Swiss Re Corporate Solutions CEO Andreas Berger, highlighted portfolio management as a tool to address volatility.

He said that it was key for an insurer to be disciplined and informed about where they play and the shape of current portfolios and target liability portfolios.

“There are different patterns – if you have a long-tail book you behave differently. We have a pretty short-tail book, we're not in the US casualty large corporate space anymore, so for us it's important to address volatility.

“It's a whole different story if you have a different portfolio mix. We try to understand how our portfolio will behave if the market softens in the next few years. We use scenario planning and analysis and then we say, okay, what do we have to add as lines of business and exposures that are decorrelated,” said Berger.

Meanwhile, Guru Johal, Deloitte vice chairman and global speciality and reinsurance leader, noted that increased retention of risks is something corporates have had to deal with as well as insurers, given available capacity.

“In addition to this, you may have more retention necessitated due to insurance risk coverage being unavailable or perceived to be too expensive, e.g., heavy energy resource industries and ESG requirements or increased cyber risks.

“The increased self-insurance and primary retentions across the end-to-end value chain of risk transfer creates an interesting dynamic for capital deployment and the risk tolerance of this capital. This will create increased demand for more creative alternative solutions,” he predicted.

Relationships and renewal dynamics

The executives on the roundtable discussed a number of other themes, including the impact on relationships from a tumultuous 1 January 2023 renewal, and likely demand and supply dynamics at 1.1 for cat.

Aspen’s executive chairman and CEO Mark Cloutier said that as a buyer and seller of reinsurance, 1.1 this year had been a bit “schizophrenic”.

“What we experienced was pretty interesting, and it really underscored how powerful and important the relationships that we build in this sector are.

“Relationships were really, really tested last year, and some of them I think were injured a little bit, but some of them really pulled through. In some of the more challenging moments we really ended up just sitting down around the table and working our way through it because of the longer-term trading relationship that we've had with people.

“I think that experience – as uncomfortable as it was – was probably good for us because one, it proved out that those relationships still matter a lot, and two, I think, the respect gained and the sort of uncomfortable experience will lead us to probably a more orderly process, even if the economics are a bit challenging,” said Cloutier.

Aon’s CEO of Risk Capital Andy Marcell was among participants hoping for better relations and an orderly renewal in the coming months.

But he also reiterated recent comments that some competitive dynamics could emerge, at least high up in towers of large globals.

“I don't think reinsurers will give much ground for the regionals around the world, or some of the large nationals. But the big globals attaching excess of 1-in-50 years, there's a lot of competition for that product – whether it's in the cat bond market [or traditional]. And I think a lot of the reinsurers will expand their shares – they all want to grow – no one’s told me they want to shrink here at Monte Carlo.

“There will be additional buying but it's not going to be 20 percent more, so they'll maintain their discipline but in the end there'll be plenty of competition – not in terms and conditions but rate, and most of the structural change took place last year,” he commented.