Guy Carpenter’s Rate-on-Line Index hit 27% high at 1/1

“This makes it the most attractive market I’ve seen in my 41 years in the business,” David Priebe, chairman, Guy Carpenter, told Intelligent Insurer.

Speaking in a video interview, Priebe outlined the supply-demand dynamics that played out in the last renewal, which ultimately resulted in some of the highest rate increases for decades. He said that risk-adjusted pricing increased by 40 to 60 percent in North America, 25 to 35 percent in Europe and the UK, and 20 to 50 percent in Asia-Pacific, with China and Australia driving the top end of that increase.

The Rate-on-Line Index, covering brokered excess-of-loss placements, has been maintained by Guy Carpenter since 1990. It represents a measure of the change in dollars paid for coverage on a consistent programme basis. The index reflects the pricing impact of a growing or shrinking exposure base, evolving methods of measuring risk and changes in buying habits, as well as changes in market conditions.

The 27.5 percent increase was more than double the increase on January 1, 2022, when it rose by some 10 percent. That was also more than double the increase a year earlier—the Index rose by 4.5 percent at January 1, 2021.

Priebe said that the renewals were very late and, while cedants’ worst fears in terms of rate hikes did not come to pass, reinsurers did gain significantly better pricing and terms and conditions.

“Depending upon your perspective, it was the best of times, or it was the worst of times,” he said. “The renewals were both extremely frustrating and very rewarding at times. Cedants and reinsurers worked hard to find a new market equilibrium in what was a very late and disjointed process. Fortunately, the market started to align just before the Christmas break.

“It pushed signings to the last minute. It required us to work closely with our clients around detailed technical discussions; we strategised on multiple solutions in a shifting environment, finding a pathway to achieve viable renewal outcomes.

“It was great to see a positive result. I think we all recognise that a healthy, dynamic, responsive reinsurance market is crucial to the global economy.”

Capacity demand

Priebe said that on the demand side, due to inflation, higher values and general economic growth, the expectation was that capacity demand would increase by as much as $10 billion. That did not fully materialise, Priebe said, but “it was clearly at the forefront of reinsurers’ minds”.

On the other side of that coin, there were concerns that supply would not meet that demand, particularly for North American peak zone exposures. “Reinsurance capital had been diminished by falling asset values and retrocessional capacity looked as though it would be constrained.

“No new money was flowing into the market due to uncertainty around reinsurance returns and the broader volatility in the financial markets. We were expecting a 10 to 20 percent reduction in supply.”

This did not materialise. Priebe said that three elements were needed to unlock capacity: structure, contract conditions and price. “Entering the market with the right structure was important. Another key area was programme attachment points. Retention levels were being carefully scrutinised and that put pressure on the bottom of programmes.

“We were facing a classic supply-demand imbalance, and reinsurers knew that. So, we knew that the renewal was going to be very challenging. A number of markets were reluctant to quote, and the quotes we did receive were very wide-ranging, as reinsurers had different views on the required returns on capital across the risk spectrum.”

Although it came late, a couple of factors helped placements get done. The retrocessional market opened up late, at the end of December, which meant that supply-demand constraints were not as acute as originally feared. “They were still real, but not as stressed,” Priebe said.

Second, the total amount of limit purchased remained relatively flat; there was not $10 billion of increased demand, as some had suggested.

Priebe explained that there were several reasons for the limit demand not to materialise. As attachment points moved up, any cedants shifted capacity not purchased on the bottom to the top. Second, some cedants had already bought robust coverage ahead of the renewal when pricing and available capacity were more attractive.

“This allowed them to absorb that increased exposure without falling outside their risk tolerances,” he said.

In the end, Priebe said, pricing settled about the mean level of the quoting range. “Clients didn’t embrace the extremes being sought by some markets. That said, reinsurers achieved massive pricing and structural improvements. And this wasn’t just in the US, it was globally.”