Focus: Clarity over coverage is critical as Covid-19 casts shadow over January renewals

Reinsurance renewal negotiations are delicately poised, with increasing pressure on rates, economic uncertainty and disputes over Covid-19 wordings putting long-standing relationships to the test.

The global pandemic has revealed exposures that had until recently not been fully appreciated – most notably in business interruption and property policies, which were not always construed to provide coverage for such a wide-reaching loss event.

It has also highlighted inconsistencies and a lack of clarity in the wordings of primary insurance policies and reinsurance contracts. This has led to disagreements over the validity of reinsurance cover, as well as how claims should be aggregated for the purpose of recovery under non-proportional excess-of-loss contracts.

Greater clarity of coverage is essential heading into 2021 and the industry is working hard to agree standardised exclusionary language, where appropriate, that is clear, unambiguous and acceptable to all parties. However, we are still some way from consensus and this topic will certainly influence renewal negotiations on both the property and liability sides, with the reinsurance market already on the cusp of a new market cycle.

Capacity and appetite

Against such an uncertain backdrop, there has been much speculation the market will see significant rate increases at the January 1 renewal. Insurers have enjoyed a buyer’s market for a number of years and reinsurers have been pushing for rate rises for some time, citing enduring soft market conditions, increased cost of capital and low interest rates as justifications long before Covid-19 took hold.

Just a few months ago, reinsurers were hoping for double-digit increases across the board but it now looks like increases, if any, will be more moderate than first predicted. Europe has enjoyed a long period of positive technical experience and a lack of large catastrophe losses, which will once again limit reinsurers’ ability to hike prices.

Overall, the reinsurance market is being very disciplined and reinsurers are expected to take a selective approach at this set of renewals. However, we believe it may be challenging to achieve the price increases predicted earlier in the year, when there was even less certainty regarding Covid-19-related claims than today and hurricane season was still to come.

While capacity tightened at the mid-year renewals, particularly in some US segments, there is at present ample capacity to meet European clients’ needs. We do, however, expect some reinsurers to adjust their exposures if rate increases are not at a level deemed acceptable.

Meanwhile, appetite for reinsurance from European cedants remains relatively constant. Guy Carpenter expects limits purchased to slightly increase in line with buyers’ increased exposures and for retentions to be generally maintained at current levels.

Volatility continues to be the enemy of chief executives and any solution that reduces volatility at an efficient cost is strategically attractive right now. For this reason, in addition to the forthcoming IFRS17 regime, C-suites appear more willing to cede premium than in the past.

Historically, boards and chief executives have been reticent about reducing their gross premium; however, in this changing environment chief executives are more focused on bottom-line profitability than on the top line and buyers are now considering proportional reinsurance arrangements that may not have met C-suite approval just a few years ago.

We are at a delicate point in the market cycle. It is more important than ever for clients to provide high-quality, transparent information about their underlying exposures and the underwriting actions they are taking, not just to limit the impact of Covid-19 but also other systemic risks such as silent cyber.

Reinsurers will look at clients that provide the best quality information more favourably and are likely to introduce exclusions if they do not secure the information they feel they need.

Common language

The biggest challenge at this renewal, however, is undoubtedly exclusionary language and clarity of wordings related to Covid-19 – particularly loss occurrence clauses and, where relevant, claim payments or claims validity.

Insurers have significant concerns regarding in-force books and books in run-off and are keen to understand which of their exposures may be excluded under their reinsurance contracts. How or if claims can be aggregated depends on the application of contractual wordings and the attitude of reinsurers on these topics has varied, with some having been more vocal than others over their intentions.

If insurers are left with large losses they believe should be covered and reinsurers are not willing to pay, this could create tensions. However, our industry has come through situations like this before and we have the underwriting experience and capabilities to find solutions acceptable to both parties.

On property business insurers and reinsurers agree systemic risks are uninsurable and should be excluded. However, no two insurers or insurance markets are exactly the same and the variety of circumstances, regulatory regimes and local market practices make it difficult to create one language that gives 100% clarity and applies appropriately to everybody.

At present, the Lloyd’s Market Association’s clauses issued in light of the coronavirus pandemic look likely to form the basis of a standardised language on property coverages, subject to some critical amendments.

Liability wordings present a bigger challenge – partly due to the complex nature of liability exposures and also as Covid-19-related losses have yet to materialise.

In this complex environment, the advisory role of the broker has come to the fore and Guy Carpenter is collaborating continuously with clients, reinsurers and legal departments to amend policies where appropriate and to help chart the right path forward for the industry.

Much work remains to be done, with these issues still needing resolution as the clock ticks down to January 1. 

Massimo Reina is chief executive for continental Europe at Guy Carpenter