Inflation a ‘Major and Growing Concern’ for Reinsurers

With buyers’ needs for capacity stable and remaining within the collective appetites of reinsurers, April 1 reinsurance renewals were orderly, according to a broker report, which points to inflation discussions and sanction exclusion wording as notable highlights.

“Inflation remains a major and growing concern for reinsurers,” James Kent, global CEO, Gallagher Re, wrote in the introduction to the Gallagher Re 1st View April reinsurance renewals report published Friday.

It is now a key topic on every line of business,” he said, adding, however, that when buyers are able to show that their original underwriting is taking inflation into account through pricing, limit and original deductible management, they face less pressure on renewal terms.

“Capacity was not abundant, but nor was it insufficient. The equilibrium which has been building over the past 18 months appeared to arrive during this balanced renewal.”

According to the Gallagher Re report, some reinsurers moved their catastrophe risk capacity to higher attaching layers or reduced overall deployed capacity, but others reinsurers offset those moves as they sought to build out their portfolios.

Typically, the April 1 renewal period is driven by the Japanese renewals, and since the Japan market has seen substantial reinsurance rate increases in recent years, along with steady improvements in original property rates, the renewal period was “orderly and less tense” in Japan, Kent wrote in the introduction to the report that summarizes property-cat rate movements in the 1-5 percent range for loss-free Japan renewals and 2.5-10 percent in the U.S.

Kent’s opening summary noted pockets of difficulty in certain specialty classes, like marine, marine retro and aerospace, and the report later breaks down commentary for these lines into pre-Feb. 24 and post-Feb. 24 periods, marking the date when Russia launched military attacks on Ukraine.

A general comment Gallagher made about April 1 Japan renewals for property per-risk, excess of loss and for general liability contracts was that there was almost universal adoption of the market standard clause LMA 3100, the Sanction Limitation & Exclusion Clause.

Several online sources reveal the wording of the LMA 3100 clause to be:

“No (re)insurer shall be deemed to provide cover and no (re)insurer shall be liable to pay any claim or provide any benefit hereunder to the extent that the provision of such cover, payment of such claim or provision of such benefit would expose that (re)insurer to any sanction, prohibition or restriction under United Nations resolutions or the trade or economic sanctions, laws or regulations of the European Union, United Kingdom or United States of America.”

The move to adopt this exclusion is part of an ongoing post-COVID trend, said Gallagher Re.

“Coming on the heels of the unexpected and unmodeled COVID-19 losses in 2020, several reinsurers have pushed harder for greater clarity over any potentially unclear areas of coverage, particularly in the area of potential war exposures and incidental exposure from non-sanctioned exposures of overseas companies in Russia and Belarus,” Kent wrote.

The section of the report devoted to global aerospace coverage describes the unintended consequence of widescale sanctions—Russia’s retaliatory response transferring aircraft leased from numerous Western-based lessors onto the Russian aircraft register. “The non-return of a significant number of assets has the potential to result in sizable losses impacting the aviation re/insurance market to an extent not seen before and to a magnitude that could bring about profound change to the structural foundations of the market,” the reports says, noting that there is “no precedent for this type of event at scale” and forecasting protracted litigation over losses.

The report said there has been early signs of reinsurers firming both coverage and pricing, but notes that firm order terms had been given on April 1 renewals ahead of these events, which meant that most placements renewed without much change.

Source: Gallagher Re

This article first was published in Insurance Journal’s sister publication, Carrier Management.