Levels of available reinsurance capital continued to exceed demand at the January 1, 2020 renewals, according to analysts at Guy Carpenter, meaning rate increases only materialised in the most constrained areas of the market.
The reinsurance broker said that the loss environment and shifting views of risk had been crucial factors at the 1/1 renewals, but that outcomes had varied significantly by geography, line, and cedent, with performance being one of the key differentiators.
In what analysts described as an “asymmetrical market,” classes where underlying performance remained positive and profitable often resulted in renewals as expiring, or in some classes modest decreases, while those with more strained operating conditions faced market corrections.
The most pronounced reinsurance rate increases were localised to specific regions or markets, typically led by successive years of losses, deterioration in performance, and changing risk perceptions, they added.
In the property catastrophe market, pricing adjustments for loss-impacted programs in peak zones were significant in certain cases, whereas loss-free accounts in other geographies trended flat to down.
And in the casualty market, higher loss cost trends, increased severity and development beyond reinsurers’ expectations led to market tightening in specific areas of the US liability market.
However, the story was different in the retrocession market, which was broadly 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 catastrophe bonds, Guy Carpenter noted.
These capacity conditions culminated in significant retrocession rate increases across several types of coverage, albeit with marked distinctions depending on products, structures, relationships, risk tolerances, loss experiences and performance.
“The (re)insurance sector is undergoing a period of transition as risk quantification strategies incorporate new information and risk appetites are adjusting accordingly,” said Peter Hearn, President and Chief Executive Officer of Guy Carpenter.
“The response of the reinsurance market to these dynamics continues to evolve,” he continued.
“At January 1, 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.”
David Priebe, Chairman of Guy Carpenter, also commented: “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 January 1 is close to flat,” Priebe added. “While reinsurers will continue to deploy capacity cautiously, with cedents’ performance and loss experiences scrutinized closely, the sector remains well capitalized overall.”
