Reinsurance News

New entrants filled capacity gaps at 1/1 renewals: Lockton Re

4th February 2021 - Author: Matt Sheehan

Following somewhat muted rate increases at the January 1 reinsurance renewals, Ross Howard, Global Executive Chairman at Lockton Re, has attributed the suppressed dynamic to new market entrants plugging gaps in capacity.

Prices increased at 1/1 on the back of a hardening re/insurance market, but rate increases were generally more modest than many participants had hoped for.

Lockton Re says this was due to sufficient reinsurance capacity, plus a few new players that plugged gaps and helped to ease pressure while reinsurers focused on claims uncertainty instead of strict rate discipline.

“While prices accelerated compared to previous years, they did less than some experts had expected,” said Howard.

“There was no lack of reinsurance capital in most lines at the 2021 reinsurance renewals, with total volumes at levels comparable to previous years at around $415 billion,” he explained.

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“New capacity of around $20 billion was added by existing players that raised new funds, as well as funds from new players, investments in insurance-linked securities (ILS), and sidecars.”

Global property reinsurance rates for example were up 6%-7% at the last January renewal, as increases of around 5-10% in the US offset by lower increases of 4-5% in other international regions.

These increases follow a year of above average numbers of natural catastrophes which caused approximately $76 billion of insured losses in 2020, according to Fitch Ratings.

Lockton noted that negotiations for some casualty portfolios were challenging at January 1, particularly D&O and contingency, driven by claims and litigation expectations.

Reinsurers also addressed the uncertainty in the market regarding Covid-19 and cyber by including tighter terms and conditions (T&Cs) for communicable diseases in contracts along with more exclusions and lower limits.

Retrocession pricing was up at around 10%-15%, which much less than at the 2020 renewals when the market experienced some capacity constraints.

But moderate rate increases happened despite concerns that significant amounts of capital could be trapped in insurance linked securities (ILS), and catastrophe bond issuance broke records in 2020, both in terms of the number of transactions and the total value of issuance.

“Because of uncertainty around the economy, reinsurers remain concerned about a low interest rate environment squeezing their investment income as well as premium income,” Howard continued.

“Potential Covid-19-related losses that haven’t been reserved properly is another concern. With claims cost likely to continue going up, particularly in the US social inflation is another matter that will drive renewals throughout 2021. Natural and man-made catastrophes can rapidly change the reinsurance environment, but reinsurance capacity is likely to remain available.”

“Instead of insurers trying to close gaps in their cover it is more likely that reinsurers will offer capacity in certain areas, taking further pressure off insurers’ balance sheets. Despite plenty of available capital, it is of course not available at any price.”

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