Global programmes and the current market environment in Europe

Global Risk Manager spoke to Rory MacLeay, international leader, Marsh Multinational, about the current environment for European multinational companies and their global programmes, growth in parametric solutions and ART solutions including captives, rising protectionism globally and tighter regulations, and the growth in the number of insurers providing global programmes.

How would you describe the pricing environment for European multinational companies and their global programmes?

Rory MacLeay: Although the pricing environment for global programmes is generally stable in Europe, we are seeing reduced limits in some areas, as well as increased retention on the property side in countries impacted by the recent weather events in Italy, Greece, and to a lesser extent, Germany. There remain, however, continued challenges for clients in heavy industry sectors, and those with catastrophe and US exposures.

While there is a stable market and, in some sectors, a good opportunity for multinational clients with a positive loss history and strong risk mitigation measures to seek improved terms, the underlying picture for property & casualty risks is potentially volatile. Carriers’ combined ratios have deteriorated in the last year; Europe, in particular, has been impacted by a number of sizeable weather-related events and the major earthquake in Turkey. Brokers are keeping a watchful eye on the upcoming treaty renewals in January, as this will no doubt see a correction in the market, with certain markets reducing or withdrawing capacity.

For D&O and cyber global programmes, there has been a recent marked slow-down on rate increases, with reductions available in most sectors. However, the new capacity is often being driven by ‘opportunistic’ carriers, so clients should be watchful of who they select, as it is likely a few markets will withdraw or reduce exposures when the market eventually corrects itself.

Which lines are the most impacted in terms of rates and terms and conditions?

Rory MacLeay: Casualty rates in Europe increased 5% in Q3, the 17th consecutive quarterly increase, but this slightly increased average rate change was driven by markets that saw an exceptionally low pricing level in recent years. Rate reductions remain possible for more ‘mid-market’ multinational risks. US exposure remains a key driver of risk appetite for almost all markets and has a direct influence on capacity deployment. Insurers remain cautious regarding loss-impacted and heavily exposed risks, with increased information requirements and internal referrals. On the positive side, various carriers have announced growth or expansion strategies across Europe, which will inevitably drive competition.

Property rates in Europe increased 7% on average in Q3, with critical catastrophe and secondary perils (such as flood, convective storm, wildfires and hail) continuing to set the price environment. We are, though, seeing primary multinational insurers reducing their exposures and adjusting their line size and rates for critical risks due to a combination of a number of factors, including higher retentions (as a result of restructuring of reinsurance programmes), increase in reinsurance and capital costs, continued loss activity, especially due to secondary peril events hitting major countries in Europe, and the ongoing inflationary environment. However, again on the positive side, global carriers are looking into expanding their upper corporate segment penetration. Emerging markets expanding their European footprint helps to release additional capacity, maintain competition and mitigate the impacts of current market challenges.

Cyber is a vital risk for all multinational companies: how is the market reacting currently?

Rory MacLeay: The recent market correction has been quite sharp on cyber: near to 40% of the renewals of last quarter went with premium reduction. The movement downward is more important in percentage of premium reduction on excess coverage than on the primary layers, whereas for large European accounts, the savings are mainly at the bottom end of the programmes – the primary, first excess layers.

Wording provision is also drastically improving: quota-share ransomware coverage is often eliminated at renewals thanks to the underlying risk quality improvement and more flexibility on the insurer’s side. Generally speaking, insurers are now much more inclined to improve the coverage based on the underlying improvement of the risks.

The capacity reduction had been quite significant on cyber during the hard market, but this is now being reversed, as new capacity continues to arrive, providing stability. However, next year could be more challenging, post the January treaty renewals, but is likely to manifest itself more as a capacity squeeze in certain sectors, rather than having a dramatic pricing impact.

Are there are any new market trends that are impacting multinational companies? Are there options, alternatives and new approaches that brokers and their clients are looking at in order to cope with the current market?

Rory MacLeay: Social inflation in the US remains a major concern and will certainly impact limits and pricing for multinational clients with US-exposed liability programmes. Inflation itself continues to be a challenge for carriers and clients, and it is critical that sums insureds are adopted taking inflation into consideration to avoid under-insurance. For those multinational clients with weather-related or catastrophe exposures, we are seeing an increase in the use of parametric solutions and ART solutions, as well as increased captive retentions. While the wave of interest in establishing a captive continues, there is also a rise in the number of global captive ‘fronting tenders’, looking at possible multi-line options to drive economies of scale.

Interestingly, and to reflect some of the unease around future market conditions, we are now seeing a renewed demand in long term agreements, particularly for property & casualty risks for multinational clients in France and Italy. In addition, we are seeing moves to shore up ‘relationship carriers’ writing multi lines rather than just the carrier who might be cheapest line by line.

Does rising protectionism globally mean it is becoming harder to establish a global insurance programme? At the same time, does it make it more crucial and necessary?

Rory MacLeay: The need for insurance should firstly be based on the business model, risk and exposure (in the foreseeable future), overall total cost of risk and the insurance companies’ ability to provide the relevant capacity. A global insurance programme, notwithstanding the tightening regulations in various regions, would still be able to ensure that the multinational company is appropriately insured without potential gaps in cover and achieve economies of scale to manage the total cost of risk.

Multinational companies should therefore ensure that they understand the regulatory and tax issues of countries in which the risks are located, identify the various options to cover the risk and the total cost of risk including taxes of each option. The need for an expert advisor, who can navigate through this increasing complex regulatory landscape, has never been a more essential component to any global insurance broker offering.

Are insurance regulators taking a tougher approach on compliance when it comes to global insurance programmes?

Rory MacLeay: As a general statement, the insurance regulatory authorities in all regions, and in particular Asia, Latin America and Africa, are tightening their regulations to protect the local insured, the local insurance market and local foreign exchange. Inevitably, this also includes increased tax burdens for the insureds. Such regulations, unfortunately, are rarely designed to the application of global insurance programmes or to meet the needs of multinational companies with cross-border activities with an inter-dependent business model.

However, Marsh would always recommend that multinational companies do not compromise on coverage needs to ensure that the principal risks, such as assets and people of the group, are protected as best as possible, but at a total cost of risk that is within the group’s overall budgetary parameters. The global programme should then address the regulatory and tax risks and their consequences for the group so that there are no ‘unbudgeted surprises’ in future.

Is the global insurance market growing, with more insurers offering global programmes? Is the market limited by the requirement to have an owned network?

Rory MacLeay: As insurers seek growth, the global programme space is seen as an attractive proposition, even for markets, which have traditionally focussed on the reinsurance or ‘wholesale’ space. We would estimate that there are now about 18 markets who can feasibly offer global programmes, which is up by approximately 50% from five years ago. However, many of the new players are still very much at the beginning of their journey.

Global insurers with a largely owned network are most definitely at an advantage, but this is not seen as an impediment for these new entrants, who ‘rent’ the networks, often off their potential competitors. The key for all global insurers is to invest in quality central co-ordination, administration and service. If the new entrants follow this mantra, they may be able to overcome the disadvantage of not owning their own networks and become a viable alternative to the traditional global carriers.