GC’s Enoizi: SRCC and relationships to dominate European reinsurers’ thinking ahead of 1.1

Reinsurers are showing an increased appetite for continental European wind ahead of the 1.1 renewals, according to Guy Carpenter’s Julian Enoizi, who stressed that underwriters remain “disciplined” against the backdrop of an active hurricane forecast and increased exposure to strikes, riots and civil commotion (SRCC).

Speaking to The Insurer on the sidelines of the annual industry congress in Monte Carlo, the reinsurance broker’s European CEO highlighted that, as ever, the ongoing Atlantic hurricane season is at the top of the agenda.

Enoizi said the manifestation of an active wind season in 2024 would undoubtedly have an impact on the 1.1 renewals, and the direction of pricing more generally, particularly given the estimated $51bn in insured losses so far this year.

However, the former Pool Re CEO stressed that reinsurers have continued to earn “substantially” more than their cost of capital at a time when real bond yields are turning positive, highlighting that cedants will be looking for a “disciplined” underwriting stance from their reinsurance partners.

“If all the forecasts of a highly active wind season crystallise, then that is clearly going to have an impact on 1.1 renewals and the direction of pricing. However, we should not get ahead of ourselves, I think you will see a continued disciplined approach from reinsurers to the market, and that will manifest across in terms of attachment, contractual coverage and pricing,” Enoizi explained.

But he acknowledged that forecasts of an active 2024 hurricane season come against the backdrop of familiar pain points for reinsurers, including the increased frequency and severity of secondary perils, and difficulties in bringing capacity to certain regional markets, such as Turkey and Israel.

“Our job at Guy Carpenter is to advocate strongly on behalf of our clients, and to engage positively with the overall picture. We are actively seeking to get the market to be willing to engage with cedants with continental European exposure, especially in light of the themes around the North American hurricane season. This approach is gaining traction.”

Enoizi noted that the 1.7 renewals earlier this year saw “resilient engagement” with European wind perils – as demonstrated by PMLs relative to shareholder funds – with increased appetite expected to continue at 1.1.

“That said, I’m conscious that the levels of EU wind appetite are less than they are for US wind. But I think there’s more of a convergence between EU and US wind in recent years, given the dynamics and the forecasts that we’re seeing in the market today,” Enoizi added.

Natural catastrophe activity in the first half of 2024 alone topped $50bn, though reinsurers continue to earn substantially in excess of their cost of capital.

“On top of that, real bond yields have turned positive relatively recently and inflation has fallen back, which continues to help drive stronger reinsurer returns,” said Enoizi. “All of those dynamics are going on, but I still think you’ll see reinsurers continue to take a disciplined approach to the market.”

Reinsurance brokers canvassed by this publication said they expect loss-free programs will see price reductions broadly consistent with the prior year, at between 5 and 10 percent. While Enoizi refused to comment on specifics, he said that loss-free programs do not detract from the disciplined market in terms of attachment levels, sideways coverage and contract terms.

“Loss-free programs get treated differently. A loss-impacted program is a different scenario – those will be individually assessed, and our role is to ensure that we do not see a broad-brush approach from reinsurers,” he continued.

But one area of uncertainty comes in the form of a recent wave of global political instability – driven in part by more than 50 countries holding significant elections this year. This has generated notable loss activity, ranging from civil unrest in the UK through to the New Caledonia riots, pegged at around $1bn.

Property treaty coverage for SRCC losses has tightened up notably in the past two years but remains available. However, multiple restrictions that should limit loss transfer have been implemented, for example, changes to hours clauses.

“SRCC is a significant focus for the reinsurance market, because reinsurers are taking what I would call an active, disciplined approach to this peril,” Enoizi commented.

This includes surface-level consideration of maintaining discipline and establishing terms and conditions around SRCC events.

“The potential for SRCC losses is huge – if you then add that to the macroeconomic environment, you’ve got a volatile situation with state-based conflict, tension between regional blocs, escalation in social unrest, and political changes. It’s a big issue for reinsurers,” he added.

Excess capacity drives return to core market principles

The most recent 1.1 renewals saw an excess of capacity supply. However, Enoizi emphasised that this has not affected reinsurers’ discipline throughout the year.

“That’s not currently leading to poor decision-making, it’s still a disciplined market. I think you will see a continuation of both that excess of capacity and a continuation of that discipline through the end of this year,” he said.

Enoizi added that the excess capacity – estimated at around 20 percent – is also driving the market back to its core principles, including building and maintaining long-term relationships between reinsurer and insurer.

“Reinsurers will take a broad cross-class, cross-product approach in their partnering of clients. That is important to clients – they don’t want to see cherry-picking but rather a genuine partnership,” he said.

“Likewise, clients will also take a view of how they manage their retentions. That’s going to be important now as those retentions have gone up in recent years. I think they’ll expect a broadening of the scope of coverage – that may be more difficult to achieve, but I think they will certainly be looking to achieve that if they can.”

From a broker perspective, advice to clients is generally focused on providing clear submissions that indicate exposure movements, understanding of the underlying portfolio and its rate movement, and management of underlying inflation, particularly claims inflation.

“I see how important the relationships between cedants, brokers and reinsurers are if you want to drive a successful outcome at the 1.1 renewals,” Enoizi concluded. “How we collectively work to drive and maintain that continued development in relationships will be another factor dominating conversations here in Monte Carlo.”