‘Abundant capital’ moderates reinsurance renewal rates hike in January

A “slower and more complicated” quoting process, rigorous contract reviews, later than average contract signing and “significant” pricing pressure for loss-impacted programs were the hallmarks of the January 1, 2021, reinsurance renewal, according to Guy Carpenter.

However, despite the challenging circumstances, the global risk and reinsurance specialist said that price increases were “moderated” compared to initial expectations for this year’s January renewal season. This was due to “abundant capital levels” and a greater willingness among reinsurers to deploy capacity in several sectors.

Further features of the new year renewal included an earlier start to proceedings, that pricing for loss-free programs remained generally in line with expectations, and that the renewal experience varied depending upon underlying portfolio exposures and performance.

Peter Hearn, chief executive of Guy Carpenter, said, “2020 has been a year like no other. It has seen our industry take the strain of unparalleled uncertainty in the loss environment and the broader economy, all while working under conditions throughout the year we have never experienced. Yet despite these pressures, the reinsurance sector has performed admirably throughout a lengthy renewal process.”

Dean Klisura, president of Guy Carpenter, added, “We are focused first and foremost on client needs and working with our reinsurer partners to achieve the best possible outcomes for clients. We truly believe that the unique challenges our market has endured have served to strengthen the bonds we have throughout this industry as we all respond to this extraordinary period.”

The global risk and reinsurance specialist emphasised that the quoting and firm order process was “more complex than in recent years”, particularly for stressed geographies and lines of business. It said that in addition to rate and structure considerations, contract wordings were a “significant component” of negotiations. Perhaps unsurprisingly given the events of 2020, communicable disease and cyber exclusions were described as “two of the more prevalent topics”.

The wide range of views on contract language and structure options helped drive “increased non-concurrencies as compared to typical recent renewal years”, according to Guy Carpenter.

However, the early distribution of submissions into the market meant companies could better manage the slower quoting phase effectively and decide solutions in response.

In terms of property renewal, overall pricing “settled at the lower end of expected increases” outside more constrained segments.

“Where placements were loss impacted, particularly in cases where retentions were perceived to be too low, reinsurers held firmer on pricing or structure adjustments,” analysts said.

Dominant themes for global property renewal included “ample capacity” available from incumbents and new entrants to the reinsurance market in the last quarter of 2020, stable limit demand, and increases in non-loss impacted programs, risk-adjusted pricing, which was up mid-single digits to low teens in the United States and by low single digits on average in EMEA and Asia-Pacific. Higher than average global large losses in 2020, excluding COVID-19, driven by frequency of small and mid-sized events also affected the renewal, while the loss implications from COVID-19 were “not as disruptive as feared earlier in the year”.

Property retrocession renewals were watched closely at January 1, 2021, as market players had expected the impact of a hardening market. However, the specialist company said that rate movements on non-loss-impacted programs were not as robust as many anticipated and continued to subside as renewal season got closer. Additional capacity in the retrocession market, lower limits bought by some global companies and increased activity in the catastrophe bond market all helped to moderate some of the upward pressures in this section of the market.

Communicable disease exclusion wording was a hot topic for every property renewal worldwide. Capital providers and investors stipulated exclusions in most cases given the global nature of this type of loss.

Guy Carpenter said that since mid-year 2020, there has been a substantial amount of focus across the industry on the best approach to satisfy the need for an exclusion, while not eroding critical protection for covered perils. The company said it has “worked diligently with capital providers during the past few months to introduce wordings that address client concerns and bring the industry closer to a consistent approach”.

Casualty renewals varied widely, depending on individual circumstances including loss experience, covered lines and industry classes written. “Every placement experienced some degree of continued reinsurance underwriting rigor around stress factors broadly encompassed by social inflation, the low interest rate environment and communicable disease,” the analysis said.

In terms of capital, overall, traditional dedicated reinsurance capital for year-end 2020 was estimated at $397 billion by Guy Carpenter and AM Best, indicating “a marginal increase on year-end 2019”.

“Favorable valuations of asset levels and capital initiatives saw capital levels recover from the decline witnessed at mid-year 2020. However, reinsurers struggled to achieve positive returns on equity due to the combined impacts of COVID-19 and catastrophe losses,” Guy Carpenter said, adding: “Dedicated capital also benefited from new capital formations.”

Lara Mowery, global head of distribution at Guy Carpenter, said: “It is a credit to the financial robustness of our marketplace that reinsurers were largely able to navigate through these challenges, respond to changing conditions and define market strategies for management and investors.”

This resilience was also evident in the insurance-linked securities arena, which again demonstrated its low correlation features. Overall, catastrophe bond offerings continued to attract significant capital while syndicated sidecar and collateralised reinsurance strategies experienced “limited new inflows of capital”. Allocations at January 1 were “complicated by year-end loss reserve ‘buffering’ related to COVID-19 and the high frequency of mid-size catastrophe losses in the United States,” the analysis said. This created uncertainty regarding the level of capital available for new and renewing placements.

“New issuances in the catastrophe bond market have been very buoyant in the fourth quarter,” said David Priebe, chairman of Guy Carpenter, “bringing full-year issuance to $10.8 billion, a new record for annual property and casualty catastrophe bond activity. Most fourth quarter issuance was well supported, which enabled many buyers to secure the top end of their size targets (or beyond) at the lower end of price guidance.”