According to Josh Knapp, Executive Vice President of global reinsurance broker Gallagher Re, aggregate protection is making a resurgence, especially for US cedants, when the program is appropriately structured and has a practical attachment point for everyone involved.
He explained, “We’re seeing that aggregate coverage is becoming more available for US cedants including appetite for all-perils agg, under a few main conditions: 1) when the program is structured appropriately, 2) when the attachment point is practical for everyone, and 3) when the ceding insurer provides a robust, comprehensive, and data-backed rationale for why they need the cover.”
However, aggregate protection has reportedly evolved, with Gallagher Re noting, “Whole-account property aggregate reinsurance attaching at earnings-protection levels disappeared almost entirely from the menu from 2020, but reinsurers are once again willing to supply ‘agg’ in some instances, albeit at higher attachment points.”
The broker suggested in a new white paper that, amidst the soft market, aggregate coverage in some cases had become a working layer, with insurers regularly recovering under their aggregate protection.
The structure is said to have helped insurers manage losses caused by the rising cost of catastrophic events, such as severe convective storms and wildfires, which were impacting results.
However, so-called secondary perils did not have developed modelling at the time, like windstorm and earthquake events, making it more difficult for reinsurers to anticipate the amount of losses they would have to absorb under aggregate treaties in the late 2010s.
Gallagher Re’s white paper continued, “Despite this, with ample capacity and reluctance to withdraw a core coverage type, the reinsurance market continued to sell whole-account aggregate until continued losses challenged the profitability of such structures.
“Low-attachment aggregate structures were recognized as unsustainable amidst the increasing frequency of smaller catastrophe events. All-perils property aggregate reinsurance was almost completely withdrawn, in practice by pricing beyond many cedants’ appetite.
“A few treaties remained, but only after a significant restructuring based on a very clear understanding of each insurer’s purchasing rationale. Many cedants dropped their aggregate cover, and instead had to rely on all-perils occurrence treaties. The result was often increased retentions for insurers.”
Yet, as per Gallagher Re, demand for aggregate protection never disappeared.
“Supported by an unprecedented surge in the availability and sophistication of risk analytics, along with shifting market dynamics, property insurers accelerated a global re-underwriting effort,” Gallagher Re noted, referring to the worldwide effort by insurers to curb losses from secondary perils.
“The effort helped to ensure that the supply and rating of primary insurance coverage better matched the new loss environment. Reinsurers improved cost-sharing with insureds through mechanisms such as increased deductibles and roof depreciation schedules, to either generate premium more commensurate with the risk, or reduce exposure. As a result, aggregate cover is back, albeit in a much more sustainable form,” Gallagher Re concluded.
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