Reinsurers look to regain more ground on casualty and professional ceding commissions

The last year has seen a reversal in the direction of ceding commissions for long-tail lines quota shares, with the upcoming 1 January renewal likely to see reinsurers push to accelerate the downward pressure on cedes.

According to a wide swath of executives, quota share treaties with significant public D&O exposures could see the past two years’ gains on ceding commissions – in some cases as high as 4 points, and sometimes spanning multiple renewals – reversed entirely.

Both broking and underwriting executives were more sanguine about potential price changes for casualty and other professional liability business, where the downward movement in cedes is expected to be more muted due to a more stable renewal environment.

Market sources have given preliminary indications that ceding commissions on deals with heavy public D&O exposures are falling 2-4 points, marking a major reversal on their upward climb just 18 months ago.

On the other hand, casualty and E&O deals are said to have been more resistant to downward pressure, with the persistence of underlying rate gains making it more tenable for those deals' economics to remain intact.

Reversal of ceding commission surge witnessed beginning in 2021

The dynamics that have begun pressuring ceding commissions are now well-established.

Hard market conditions on underlying business began in 2019, initially driven by the shortening of limits by industry giants AIG and Lloyd’s, and later accelerated by the pandemic loss cost uncertainty that followed. These conditions strengthened projections of portfolio profitability.

The improved economics on underlying portfolios led to an unusual shift in reinsurer appetites, leading casualty and professional liability quota share deals to become attractive diversifying classes as reinsurers have been handed consecutive loss-making years on property cat deals.

The heavy demand among reinsurers for long-tail lines proportional deals led ceding commissions to surge at 1 January 2022 and 1 June 2022 renewals, with cedes in many cases going up by 2 points, or as high as 4 points in some instances.

Ceding commissions in the mid-30s became viewed as the “new benchmark” for reasonably well-performing portfolios, as brokers and reinsurers found agreement that persistent underlying rate gains had created significant new margin on many deals.

At the same time, the market witnessed aggressive buyer and broker behaviour with cedants slashing cession rates substantially, in a move to retain more of the increasingly profitable underlying business net.

In some cases, reinsurers wrote deals with ceding commissions as high as 38 percent, a point at which others walked away. These moves have been viewed by some as cynical bids to get a foothold on deals, and as a way to extract greater leverage when commissions would inevitably fall.

Long-tail lines adverse PPD, cat hard market gives reinsurers more leverage

In the past year, as prior accident years have begun to develop adversely and underlying rate increases have slowed to the extent that they have failed to meet cedant projections at earlier renewals, reinsurers that gained leverage on panels by writing deals with higher cedes have put themselves in the driver’s seat.

At last year’s renewal the challenging market for cedants to fill out loss-impacted property cat programs allowed reinsurers that tolerated high long-tail lines ceding commissions to extract increasing concessions on casualty and professional liability deals, putting downward pressure on cedes.

In a noteworthy example of the market trajectory, The Insurer reported last December that Zurich North America had trimmed the ceding commission on its D&O treaty by 2 points while keeping the commission on its casualty quota share essentially flat – pointing to the diverging outcomes in the two lines of business.

Additionally, Markel lifted the annual aggregate deductible on its 1 December financial lines treaty by 4 points to 35 percent from 31 percent, effectively lowering the ceding commission on the deal.

Gallagher Re’s mid-year renewal report this year highlighted the divergence in downward pressure on casualty versus professional liability treaties, where it showed ceding commissions for professional liability business renewed between down 3 points and flat.

In contrast, commissions for US general liability quota shares renewed on average down 1 point to flat.

As reinsurers aim to impose broad, market-wide downward pressure on commissions, the common refrain among brokers that each deal is unique is likely to get louder for casualty and professional liability deals, specifically at 1.1.

Industry executives largely expect that the most aggressive buyers in recent years – those that pushed most heavily on commissions and also those that drastically cut cessions – could potentially face the most downward pressure on cedes.

That said, market appetite amongst reinsurers for long-tail lines deals remain strong, and the oft-held market dynamic where commissions tend to go up faster than they come down is likely to remain true.

Perhaps the biggest question mark that loomed at the last 1 January renewal – whether cedants will increase cessions into the market – once again hangs over the upcoming renewal, likely to an even greater degree.

The question in the minds of both brokers and underwriters will be the extent to which cessions will grow and panels will expand to forestall a greater drop in cede, and to bring in more capacity for difficult-to-place deals – such as property cat – by satisfying markets with more attractive casualty deals.