GC: 1.1s now “largely completed” as new capital emerged in December

Guy Carpenter says the reinsurance markets have been seeking a “new equilibrium” but are not yet fully “settled” after a late 1.1 renewal that also saw some capital inflows emerge at the end of the fourth quarter.

In a statement ahead of the release of its full 1 January renewal report, the Marsh McLennan-owned intermediary said the renewals proved to be “one of the most challenging reinsurance markets the sector has experienced”.

But it added: “Ultimately placements were largely completed at client-issued structures and pricing, without many of the requested modifications in coverage.”

It also noted that after an initial impasse “[new] capital did start to move more freely into the sector in December as the degree of market correction became clearer”.

Although the broker did not mention any companies, ILS funds/collateralised reinsurers appeared to be the main beneficiaries with Vantage, Stone Ridge, DE Shaw and Aeolus being referenced as active participants at this renewal. Lloyd’s/Bermuda carrier Ark also raised $250mn for a new 1.1 sidecar Outrigger Re, principally from funds provided by its owner White Mountains.

Guy Carpenter also noted that after initial wide gaps in expectations between cedants and reinsurers, “progress has been made finding paths to completion and many non-concurrent coverage issues have been resolved”.

But the firm added: “There is still work to complete; this is not yet a settled market.”

Dean Klisura, president and CEO at Guy Carpenter, said that looking past the 1 January 2023 renewal, it’s important to remember that “we have been at crossroads before”.

“In prior reinsurance cycles, significant catastrophe loss events such as Hurricane Andrew, the attacks of September 11, 2001, and Hurricanes Katrina, Rita and Wilma were the catalysts for market corrections that preceded new capital entering the sector,” Klisura said.

“It is imperative that the industry stay focused on providing workable client solutions, thorough coverage and balanced pricing for the long-term sustainability of cedants and markets,” he continued.

Property: pricing and structural changes unsupported by technical considerations

Guy Carpenter noted that property was the most challenged sector at 1 January, with market adjustments focused on three distinct areas: pricing, attachment and coverage.

The broker highlighted that consistency in coverage and achieving concurrent terms were priorities for cedants.

“Ultimately, coverage changes that presented the most extreme erosion of value were not widely taken up and market-wide adjustments were largely limited to terror and strike, riot and civil commotion clauses,” the intermediary said.

Guy Carpenter said the imbalance of supply and demand in property cat created a “stressed market” and in some cases led to pricing and structural changes unsupported by technical considerations.

“While conditions warrant a market correction, not all outcomes were logical or sustainable,” it said.

Guy Carpenter noted that average price adjustments and increased attachment point movements were “substantial across the portfolio” on a global basis.

But the intermediary said that while some reinsurers reduced or withdrew their property capacity in 2022, others are now viewing this market “inflection point” as an opportunity to increase their participation and pointed to future outcomes stabilising as capacity deficiencies moderate.

Guy Carpenter added that the expected inflation-driven increase in demand did not materialise as buyers reassessed the cost/benefit of additional limit purchases, which resulted in only negligible increases.

Casualty: pressure on pricing

Outside of property, Guy Carpenter said underwriting requirements in other classes of business varied widely.

Looking at casualty lines, treaty results were highly dependent on prior-year results, underlying rate changes and overall portfolio performance, with pressure on pricing seen across most lines.

Overall, once market-clearing pricing was determined, capacity was stable across most casualty lines with very little change to terms and conditions, Guy Carpenter said.

Commenting on how the broker is helping clients address the challenges of this renewal period, chairman David Priebe said: “As reinsurers adjusted their approach, Guy Carpenter worked closely with our clients to prepare for more detailed, technical discussions and to strategise on multiple solutions in a shifting environment, finding pathways to achieve viable renewal outcomes.”

Dedicated reinsurance capital down in 2022

Ahead of the release of its full 1 January renewal report next week, Guy Carpenter noted other significant market developments including the contraction of dedicated reinsurance capital in 2022.

Guy Carpenter and AM Best’s projection of traditional dedicated reinsurance capital was $435bn at mid-year 2022, an 8 percent decrease from year-end 2021.

Since then, the rise in interest rates and continued risk of recession has caused asset values to deteriorate further, creating additional downward pressure on capital levels.

In 2022, 42 different catastrophe bonds were brought to the 144A market for more than $9bn in limit placed, taking the total outstanding notional amount to $34bn, an all-time high.

In view of constrained investor capacity, a majority of the bonds priced at or above the higher end of the price guidance and attracted less total limit. Investors also pushed back on complex books, secondary perils and more involved structures.

The projected 2022 annual large loss total rose to $112bn, driven by Hurricane Ian. European flood and hail events, Australian floods and US severe storms also contributed to the 2022 loss experience. The total estimate does not include the impact of the most recent December events.