The January test has moved to specialty lines

Every September the reinsurance industry gathers in Monte Carlo to argue about the price of the coming year's risk, and by Neil Eckert's account the argument has left property catastrophe, where capital is abundant and rates are softening, for the specialty lines, where the losses are large, recent and not yet all counted.

Eckert, chief executive of the Bermudian reinsurer Conduit Re and a cofounder of the business, told AM Best TV at the Rendez-Vous de Septembre that specialty business poses conflicts ahead of the January renewals, putting it plainly: “You’ve got top-down masses of capital and a softening market, and then bottom up in specialty, you’ve had three very big events in the last five years,” he said, in remarks reported by the Royal Gazette Bermuda Re.

He named three: the collapse of Baltimore's Francis Scott Key Bridge, which he said could generate insured losses of between $1.3 billion and $2.7 billion; political violence and terrorism, where he put the potential losses at $4 billion; and the continuing uncertainty over Ukraine-related claims.

None of the three sits comfortably inside a catastrophe model, which is why they matter to a renewal argument: a bridge collapse is a single-asset event, war and political violence are driven by politics rather than weather, and Ukraine-related claims have run for years without settling into a number a reinsurer can reserve against. Specialty is the part of the book where judgment counts for more than modelled loss, and it is where Eckert sees the conflict ahead of January.

“Some of those claims are working their way through the system,” Eckert said, and how the leaders on them address the claims, and how clients respond to the people who will be paying big claims in the future, is in his phrase “probably the issue of the year-end.”

Conduit's own posture into that year-end is defensive in a way worth reading closely: the company aims to protect its margin and balance sheet rather than pursue future growth in its property book, and it is raising the share of excess-of-loss business in its property treaty portfolio, with a long-term target of 50 per cent.

That is a portfolio buying distance from the frequency, and Conduit has concluded that a softening cat market is not worth chasing on rate; the way to hold margin inside one is to attach higher and let the price war happen beneath it.

The choice carries beyond Conduit's own book: excess-of-loss business is cover that sits above a cedent's retention, so a portfolio weighted toward it takes severity rather than sharing a client's frequency, and a carrier that writes more of it is telling clients the frequency layers are theirs to hold. If enough reinsurers make the same move at once, the layers closest to the loss are the ones that thin first, and January is where that shows up.

Building the upper layers takes catastrophe talent, and Conduit moved on that in early September, hiring a three-person property team from PartnerRe's catastrophe desk to fill its property leadership, as this publication reported. Ambition in the underwriting seat and a shift up the tower point the same way: away from frequency, into severity, in a book built for a renewal season it does not expect to win on price.

Eckert's read on specialty was not the only warning on offer: Doug Howat, chief underwriting officer of Convex, told AM Best TV that uncertainty over US casualty reserves is a key consideration for re/insurers, and Convex's answer has been restraint. The company has kept its American casualty exposure relatively modest since its 2019 launch, growing it gradually over the past two years while holding conservative line sizes, monitoring retentions, and avoiding some sectors, including pharmaceuticals.

The worry that once dominated that book has moved: the market had been concerned that casualty written from 2014 to 2019 would need stronger reserves, Howat said; the concern now is more recent underwriting years. “People are starting to talk about whether actually 2020 to 2024 are the years that they still need to be concerned about.”

For Convex the response is to select the right re/insurance partners, including companies with a record of pricing business successfully through the market cycle, a test that rewards underwriters who have already been through one turn of it.

Ryan Mather, chief executive of Ariel Re, placed a third class in the same frame: cyber has evolved and is affected by new technology available to criminals, he said, and the industry still lacks enough data to know what its most severe potential losses might be. “We understand roughly what happens, but no one can predict what the one-in-100 or one-in-1,000 is for cyber at this stage.”

That gap is a pricing problem rather than a modelling one, and a reinsurer that cannot put a number on the one-in-1,000 has to price the uncertainty itself, which is the hardest thing to charge for in a market already soft enough to notice.

The three classes share a shape: the bridge, the casualty reserves and the cyber tail are all places where the price rests on a loss estimate that time has not yet validated, while property catastrophe is missing from the list because it is where the industry's models are strongest and the capital chasing them most abundant, which is why the price there has already gone.

The soft cycle's discipline test has moved from price to attachment points, and Conduit's tilt toward excess-of-loss is that argument in portfolio form. The company is not defending a rate so much as buying distance from the frequency, a rational move for one balance sheet and a harder one for the market left to fill the layers it steps away from.

The January renewals will test the other half of Eckert's point, that clients decide how to treat the carriers paying their large claims: the leaders who fund the bridge, the political-violence and the Ukraine losses will argue their pricing case in December, and cedents will choose whether to reward them with the same programs or to shop the layer to whoever is cheapest.

The losses Eckert described are the most likely candidates for the reset: should the bridge claims or the Ukraine claims climb past the retentions their leaders wrote, the January argument over specialty pricing gets settled by outcome rather than negotiation, and cedents make their choice about which carriers to follow with that outcome in front of them.