Reinsurance renewals at 1 January 2020 were shaped by deteriorating loss experience, a lack of new capital inflows and increasingly challenged environments in the primary insurance and retrocession markets, according to Guy Carpenter & Company in a report.
While reinsurance supply was largely sufficient to meet increasing demand in all but the most constrained areas, outcomes varied significantly by geography, line of business and cedant, with performance one of the key differentiators, the company said.
The loss environment and shifting views of risk were crucial factors in changing market sentiment. The impact of risk reassessments has been particularly pronounced in the primary insurance market to date, where de-risking exercises at some players have led to the scaling back or withdrawal of capacity from several underperforming lines of business.
An asymmetrical market
Citing what it calls ‘an asymmetrical market’, Guy Carpenter said market conditions remain favourable in the reinsurance sector, which continues, in the main, to operate in an environment of abundant capital and capacity.
But this is certainly not a one-size-fits-all market. Classes where underlying performance remains positive and profitable often resulted in renewals as expiring renewals, or in some cases modest rate decreases, at 1 January 2020.
On the other hand, those with more strained operating conditions faced market corrections, some significant. The most pronounced rate increases were localised to specific regions or markets, typically led by successive years of losses, deterioration in performance and/or changing risk perceptions.
Guy Carpenter noted that reinsurers’ capacity deployment strategies were realigned in a select number of US liability classes at 1 January, as reinsurers reacted to pockets of heightened loss ratios and an increasingly difficult legal environment – both of which, it added, were being countered by significant positive underlying rate momentum and underwriting actions within cedants’ primary portfolios.
In the retrocession market, the environment was challenged at the 1/1 renewals, characterised by trapped capital, a lack of new capital and continued redemptions from third-party capital providers. Shifting market dynamics prompted reinsurers to weigh the alternatives of accepting enhanced volatility potential or considering alternative vehicles, such as CAT bonds. These capacity conditions culminated in significant retrocession rate increases across several types of coverage at renewal, albeit with marked distinctions depending on products, structures, relationships, risk tolerances, loss experiences and performance.
The backdrop to casualty reinsurance renewals was more difficult, according to the briefing, as heightened litigation costs and more generous jury verdicts – and attitudes – in the US forced reinsurers to adopt more cautious positions. Higher loss cost trends, increased severity and development beyond reinsurers’ expectations led to market tightening in specific areas of the US liability market.
“The (re)insurance sector is undergoing a period of transition as risk quantification strategies incorporate new information and risk appetites are adjusting accordingly,” said Guy Carpenter president and CEO Peter Hearn. “The response of the reinsurance market to these dynamics continues to evolve. At 1 January 2020, there was more than sufficient capital relative to demand for most renewal placements, even as reinsurers navigated elevated losses and adjusted underwriting assumptions to reflect changing perceptions of risk. However, market conditions have clearly tightened and negotiations became a function more of price than capacity.”
Guy Carpenter chairman David Priebe said, “The reinsurance market enters 2020 in a solid position with initial analysis of dedicated reinsurance capital up slightly as compared to a year ago, bolstered by mid-single digit growth in rated capital in 2019. Accounting for the impact of trapped capital, total available capital at 1 January is close to flat. While reinsurers will continue to deploy capacity cautiously, with cedants’ performance and loss experiences scrutinised closely, the sector remains well capitalised overall.” M