Guy Carpenter on three pressure points at January reinsurance renewals

Deteriorating loss experience, a lack of new capital, and difficult retrocession markets all had an impact

Guy Carpenter on three pressure points at January reinsurance renewals

Insurance News

By Bethan Moorcraft

Reinsurance renewals at January 01, 2020, were impacted by deteriorating loss experience, a lack of new capital and increasingly difficult environments in the primary insurance and retrocession markets, according to Guy Carpenter & Company, LLC, a global risk and reinsurance specialist and a business of Marsh & McLennan Companies. 

Results varied across geographies and business lines, but the reinsurer said supply is “largely sufficient” to meet increasing demand in all but the most constrained areas. The most pronounced reinsurance rate increases were localised to specific regions or markets, and were typically driven by successive years of losses, performance deterioration and changing risk perceptions. Three areas of the market under notable pressure this year include US liability, retrocession, and catastrophe programs.

Lara Mowery (pictured), managing director and head of global property specialty at Guy Carpenter, explained: “Addressing US liability, a deteriorating loss environment led to market tightening at January 01. These increased loss dynamics were driven in large part by rising social inflation and a more aggressive plaintiffs’ bar, fuelled in some instances by the growing influence of litigation finance. Heightened litigation costs, more generous jury verdicts and shifting attitudes coalesced to push up pricing in the single-digit range for non-loss-impacted excess of loss programs, and even higher for loss-impacted programmes.

“Reinsurers were more content to leave commission levels on proportional business unchanged, as they’re benefitting from significantly higher rates on underlying business, often beyond original projections. With little prospect of a change in loss cost trends, and growing signs that the reserving cycle may have reached an inflection point, conditions in the liability market are likely to remain challenging this year (and beyond).”

The retrocession market also faced challenges at January 01, in the form of trapped capital, a lack of new capital, and continued redemptions from third-party providers. The sheer amount of global catastrophe losses over the past few years has had a particular impact on the supply and demand dynamic for capital in the retrocession market.

“More importantly, virtually all significant [catastrophe] events over the last three years have brought unanticipated or unmodelled loss components and a longer average development tail than expected,” Mowery added. “Growing concerns about the quantification of climate change impacts and model credibility also led to more cautious catastrophe allocation strategies. All this culminated in significant retrocession rate increases across several types of coverage at January 01, albeit with marked distinctions depending on products, structures, relationships, risk tolerances, loss experiences and performance. These same factors, plus the impact of changes in retrocessional pricing also impacted catastrophe programs exposed to perils such as wildfire.”

Despite these significant challenges, characterised by three years of quite dramatic catastrophe losses, the global reinsurance market enters 2020 in a solid position, according to the reinsurance giant. This is partly down to the entry of tens of billions of dollars of alternative capital into the sector.

“This culminated in alternative capital rising by 150% between 2012 and 2018 and played a crucial role in driving down reinsurance pricing at the same time,” Mowery told Insurance Business. “The sustained growth of alternative capital meant losses were spread more broadly across the reinsurance sector. And the ability of capital markets to reload so quickly after the largest loss year ever seemingly confirmed a structural change in how capital is provided to the reinsurance market, with third-party capital entering the sector post-loss to fill gaps more or less immediately.  

“In 2019 as alternative markets pulled back slightly, rated market participants grew dedicated reinsurance capital by approximately 5% as calculated by Guy Carpenter and AM Best, for overall sector capital growth of just over 2%. The level of sophistication and expertise residing throughout the (re)insurance market bodes well for future resilience. Areas such as enterprise risk management and capital modelling have enhanced carriers’ risk management capabilities and overall balance sheet strength.”  

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