Divergence at renewal over pricing, structure and retained risk: MS Re

As catastrophe rates come under pressure, buyers and reinsurers are set to diverge over how recent performance, programme design and retained risk should shape January renewals, says MS Re’s Philippe Froncioni.

Key points:
Renewal views are set to diverge
Broader terms could add volatility
Open dialogue strengthens outcomes

Some clients might seek greater recognition for the balance built with reinsurers during benign years. Others could adjust retentions, limits or programme structures, or decide to retain more risk based on their own capital position and appetite.

Those choices are likely to create very different renewal discussions at January 1, according to Philippe Froncioni, head of international complex cat and APAC at MS Reinsurance.

“This is where views are likely to diverge at renewal,” Froncioni told Baden-Baden Today. “Reinsurers will differ in how they weigh technical price, recent performance and the value of the broader trading relationship; clients will differ in how they use programme design and retained risk to address rate trends.” 

Renewal choices

That debate is becoming more important as catastrophe pricing comes under pressure in Northern Europe. Froncioni pointed in particular to the UK, the Nordics and the Netherlands, where the absence of major catastrophe losses over the past 15 to 20 years has helped push rates lower.

He acknowledges that recent performance should influence pricing but says it cannot become the only measure of technical adequacy.

“A catastrophe programme is designed to cover a much longer time horizon than the most recent loss experience,” Froncioni said. “When we price a treaty, we consider events at the 50-, 100- and 250-year return periods.”

The challenge, he added, is to recognise favourable experience without giving too much weight to recency and weakening protection intended for much rarer events. 

Buyer leverage

Cedants and brokers are also playing a more dynamic role in setting renewal expectations as capacity remains plentiful. “In a softer market, we are seeing cedants and brokers play a more active role in driving pricing,” Froncioni said. Some are increasingly “desk-pricing” programmes or setting expectations before fully canvassing market appetite.

He sees that as a normal feature of this stage of the cycle, but questions how far price and terms should be pushed. “The question we would ask cedants and brokers is whether their role is simply to secure the cheapest price and broadest terms in any given year, or to build a stable catastrophe programme that supports the cedant and its underlying business over the longer term,” he said.

If margins and terms deteriorate too far, he warned, programme sustainability can weaken and leave buyers with a harder adjustment when the market turns. 

“The strongest outcomes will come from an open, partnership-based discussion.”

Coverage risk

One of the bigger risks, Froncioni said, in a soft market is not price alone but the broadening of cover. He pointed to the addition of cyber coverage to catastrophe treaties, particularly in upper layers where minimum rates on line may apply. Packaging additional cover can be attractive to buyers, but it also increases uncertainty around how a programme should be priced. “Broadening them today may create much greater pricing volatility tomorrow,” he said.

When conditions turn, reinsurers might reassess which terms they are prepared to accept, potentially changing the cover available to buyers. 

MS Re itself is open to considering more catastrophe opportunities than it did several years ago. Froncioni said: “We have now built that more diversified and balanced portfolio and recognise that this gives us a stronger foundation for taking on more catastrophe risk.”

That does not mean capacity will be deployed indiscriminately. He clarified that greater participation depends on “the right relationship, client and price”, with attachment points, exposure, terms, pricing and margin all considered alongside the wider client relationship. 

“Primarily it comes back to the quality of the client partnership,” he said. “Is it broad and balanced? Do we understand what a client is looking to do, and does the cat strategy help support that relationship?”

For the coming renewal, he expects abundant capacity and competitive pressure to remain, but also expects significant differences in how reinsurers assess and price catastrophe risk after several benign years.

MS Re is prepared to recognise improving conditions where treaty performance and the strength of the relationship justify it, he noted, while keeping pricing and structure technically sound.

“We do not view our client relationships as a zero-sum game, where one side can succeed only at the expense of the other,” Froncioni said.

“The strongest outcomes will come from an open, partnership-based discussion that recognises the client’s experience while preserving the long-term integrity of the catastrophe cover.” 

Philippe Froncioni is the head of international complex cat and APAC at MS Reinsurance.

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