Gallagher Re’s Wakefield: Reinsurers have successfully insulated themselves from mid-sized losses

Reinsurers’ strong H1 earnings have served as a “proof of concept” for the widespread move to raise attachment points, according to Gallagher Re CEO Tom Wakefield.

Wakefield told The Insurer TV that reinsurers had succeeded in moving themselves away from mid-level losses, but that the shift in terms means insurers are now absorbing these losses within their earnings.

He said this is “continuing to put pressure on underlying insurance rates”.

For attachment points to return to lower levels, Wakefield said a first step for clients seeking earnings-based cover would be to more clearly define the peril.

Wakefield cited “flourishing” index products and cat bonds that, as a result of their single trigger, have proved more straightforward to underwrite.

In the short term, Wakefield said he expected “no surprises” from reinsurers on rate increases at 1.1.2024.

If reinsurers see value increases within the underlying exposure then price increases will likely follow – however, Wakefield noted that on a risk-adjusted basis prices will “look more like flat”.

No solution for trapped capital

While earnings cover has seen a limited supply of capital, Wakefield said capital supply had been more plentiful for tail losses from natural perils and cat.

He said concerns remained over a lack of solutions for trapped collateral.

“If the collateral is trapped, that is money that is tied up, and it's very difficult to recycle that money, and that dilutes returns significantly,” he said.

Supply in the “flourishing” cat bond market has also “increased exponentially” over the last year, Wakefield said, including the use of private cat bonds “where the cost to do the bond is lower, you can place there for lower limits, and you can do it quickly”.

Cat bonds and index products have driven capital into what Wakefield described as a “thriving retrocession market,” although he said capital is slightly down.

In particular, Wakefield said a number of retrocession writers were looking to attach on a US all-natural perils basis excess of $80bn, which had been a focal point for retro market capital.

The Gallagher Re CEO characterised the retro market dynamic in a similar fashion to the reinsurance-insurance dynamic.

“It's taking adjustment from reinsurers to work out how their own portfolios feed into that retrocession, and what the right level of protection is as retrocession has moved further away from the action.”

Growing cyber market needs work

Despite Gallagher Re’s intention to expand into cyber, Wakefield felt there was “a lot of work to be done” in the space.

This came as the ransomware and attritional loss ratios in cyber have “started to rise again”, according to the CEO.

He suggested there also needs to be greater thought on the market impacts of public bonds, the first of which was launched by Gallagher Re and Beazley earlier this year.

Another area Wakefield said renewals could focus on was political violence and terror, particularly strikes, riots and civil commotion and war.

He said there were non-concurrent terms and conditions between insurers and reinsurers, which meant clients were writing on one basis and buying on another.

Finally, he said much work has been undertaken to address the challenge of inflation, but Wakefield expects more at the coming renewals.

“Inflation is now very much worked into the underlying portfolios,” explained Wakefield, with insurers having enacted significant deductible rises and some increase in limits.

“There's likely to be more increase in limits as probable maximum losses get pushed out. I could certainly see some of the bigger clients continuing to increase deductibles and then using that additional funding to buy more limit at the top of programs,” predicted Wakefield.