Property buyers can rethink cover without lowering retentions: Gallagher Re

Property insurers can use falling rates to add protection and choose reinsurance partners able to support their plans, says Adam Schwebach, Gallagher Re’s head of North American property.

Key points:
Higher retentions suits some buyers
Rate savings can fund more cover
Partner choice reflects future plans

North American insurers are increasingly taking advantage of softer rates and expanding reinsurance supply to reshape their structures for the long term – a far cry from the pressures of some recent renewals.

That is according to Adam Schwebach, head of North America property at Gallagher Re, who said more capacity means more choice, giving buyers the freedom to set terms and select trading partners based on long-term value rather than necessity.

“We’re past the point of needing to think: what do I need to do to get this renewal done?” Schwebach told APCIA Today. “We’re seeing buyers now looking at the opportunity. They can ask: what do I want my reinsurance structure to look like? Who do I want my reinsurance trading partners to be for the next three to five years?”

With market conditions in their favour, Schwebach said carriers can also lay the groundwork for expansion. Rather than simply seeking lower rates, buyers should put arrangements in place that support new underwriting opportunities and balance-sheet growth.

“The world is basically their oyster this year. They should put tools in place so that they are in a solid position to grow and take on new opportunities,” he said.

Redeploying the savings

There may also be less pressure on terms and conditions that some reinsurers anticipate. Attachment points might not need to fall, Schwebach explained, because some primary insurers have strengthened their capital bases, and are better able to absorb a single large catastrophe loss.

The real threat to their balance sheets is frequency: multiple mid-sized events each of which sit below the retention, eroding earnings without triggering a reinsurance claim.

“We may have got to a point where some cedants have been able to add to build their capital bases, and retention levels are fine,” Schwebach said. “But they’re still going to be focused on aggregate losses and how multiple events can add up. They want to avoid that death by 1,000 cuts scenario. But that’s the opportunity: in a perfect world, what reinsurance do they need?”

This trend can be seen in practice. The midyear renewals demonstrated this approach in practice. Gallagher Re said rates fell by 20 to 25% in some areas, but cedants did not necessarily reduce their overall spend by the same amount.

Having secured price reductions, cedants used the savings to purchase extra protection they had previously gone without. Insurers also directed that capital towards higher limits and multi-year coverage.

Rather than placing an entire programme on multiyear terms at the same time, Schwebach said there was strategic value in spreading that protection across different renewal dates. “The ability to stagger multi-year protection definitely provides resilience and stability in pricing over the long run,” he said.

Reassessing partnerships

Greater market choice also transforms contract negotiations. With alternative capacity readily available, cedants can push back against restrictive clauses and narrow coverage definitions introduced during recent hard renewal cycles.

“Buyers and brokers aren’t beholden to a reinsurer that says, ‘these are my terms that come with my capacity, take it or leave it’,” Schwebach noted. This commercial shift is prompting a deeper reappraisal of reinsurance panels.

While reinsurers that supported cedants through difficult renewals earn goodwill – “there should be some reward for that, and buyers have long memories, as do reinsurers”, Schwebach observed. He said carriers are looking beyond past loyalty.

Panel selection increasingly hinges on which reinsurers can support expansion into new territories and lines of business, alongside technical collaboration in data science and portfolio modelling to help primary carriers refine their underlying risk selection. That search for comprehensive alignment is also drawing in alternative capital.

Moving beyond transactional catastrophe bonds, several insurance-linked securities (ILS) investors approached broker teams during the renewals seeking to write traditional reinsurance lines across entire programmes.

“That’s something we saw mid-year, which I wasn’t expecting to see this early in that market’s evolution,” Schwebach said. By pairing expanding capital with disciplined panel selection, property insurers are using the softening market to construct programmes built to withstand the next inevitable turn of the cycle.

Adam Schwebach is Gallagher Re’s head of North American property. He can be contacted at: adam_schwebach@gallagherre.com

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