Ariel Re seeks an added dose of contract clarity

Ariel Re came to Baden-Baden with a taste for property-cat and it has room in the book for more European risks.

The first step in bringing new property-cat reinsurance specialists from their core market of the US to Europe could be an added dose of contract clarity, something reinsurers might feel they have had in greater quantities elsewhere.

That is what cedants could hear from underwriters Tom Orton and Giovanni Maccioni when they sit down for Baden-Baden speed dates this year with Ariel Re. They come to the German resort with a taste for property-cat and they have room in the book for more European risks.

“Europe is small for the moment for us,” Maccioni told Baden-Baden Today. “We think the conditions are not there yet. We are telling our clients that we need to see a change in terms and conditions and price.”

Ariel Re walks in with a property and catastrophe focus, at some 70 percent of total book, albeit expanding in other lines. That property leans roughly 70 percent to the US and the rest to the remaining global markets.

“The priority has to be contract certainty—knowing what is covered,” Orton said of how the two-man Ariel Re team in Baden-Baden is judging the early previews from cedants. Such contractual certainty fits an Ariel Re drive to “narrow the scope to perils and regions we are familiar with”.

“Cedants are ready to listen, but we are curious how far they are ready to go,” Maccioni said.

There is precedent for a move towards tighter coverage definitions, so European resistance to newer structures should have its limits.

“US contract language is a lot cleaner for US cedants,” Orton said. “There are clauses that exist in Europe that just don’t exist in the US; reinstating in the same event is one; or the US does named perils, named storms.”

“We will be looking at free reinstatement and named natural perils.”
Tom Orton, Ariel Re

The two markets are not perfectly comparable and other factors, chiefly demand and supply drivers, create differing pricing dynamics, but contract certainty is everywhere a conduit to easier renewals, they nonetheless noted.

“You may be exposed to perils you haven’t priced for,” Maccioni said. “Europe is behind in addressing this. US cedants offer a much greater clarity of cover than a lot of other international markets.”

The list of contract glitches and clauses that will go under the microscope in the current renewals season is considerably longer.

“The priority will vary a bit by cedant and contract, but we will be looking at free reinstatement and named natural perils,” Orton said. “Then we’ll be trying to remove the terms and conditions that belonged to the soft market—the multi-year terms and the adjustment premium mechanism.”

Retention levels

There is one common demand from other reinsurers in 2022 that cedants won’t likely hear from Ariel: retention levels. Ariel Re, by targeting catastrophe perils, isn’t worried about the retention levels which have not moved with inflation for the past 10 years, not to mention the past year’s runaway inflation levels.

Price is no secondary issue, and rates must rise “materially”, but pricing the types of structures Europe has run in years prior won’t tell the market much in 2022.

“We are going to play with our cards facing up.”
Giovanni Maccioni, Ariel Re

The reason: the contract uncertainty Ariel bemoans will only add extra layers to pricing demands in a situation where rates must already take a long journey back towards adequacy.

“It’s not just price, but the uncertainty around the price,” Maccioni said. “It is difficult to price the uncertainty, but we do know how to reduce it and that is contract certainty.”

Prior year pricing exercises from Baden-Baden and through towards the later renewals process brought “expectations that were a bit clearer”, Maccioni said. “This year there is a lot of uncertainty about what the price will be.”

Cedants may have missed the message. All early signs say that retaining current structures is the top priority for cedants and the “biggest sticking point” moving forward. But ears seem open and few submissions have come in which appear set in stone.

For Ariel Re, Baden-Baden and the European renewals should be a growth opportunity, given the widespread nature of the calls for more rate, lower retentions and tighter structures.

“We are going to play with our cards facing up: if the terms and conditions and price are there, we are going to be open to write more and larger lines,” Maccioni said. “Or we are fine with reducing.”

“In fact, this is exactly the time to reduce if the terms and conditions are not right.”

Main image: Shutterstock / Parilov