GC’s Rousseau: “Risk-adjusted plus” market phase may be “stickier” amid macroeconomic uncertainty

In his first interview since joining Guy Carpenter as CEO for EMEA and global capital solutions, Laurent Rousseau outlines market dynamics as we head into this year’s Baden-Baden meeting.

The arrival of Laurent Rousseau at Guy Carpenter last month came during what the executive describes as “a delicate phase” in the reinsurance market’s transition.

“The significant price increases that we witnessed at 1 January 2023 were what I would refer to as ‘risk-adjusted plus’ pricing,” he said.

“Rate adjustments were factoring in multiple different market developments, such as changes in the risk environment, the ongoing impact of inflation, the geopolitical environment, and rising loss costs. These contributed to a sharp rise in pricing in a short period, as reinsurers sought to generate stronger returns.”

Rousseau said this “risk-adjusted plus” phase of pricing was now stabilising across many business lines, but predicted continued discipline at upcoming renewals.

“We expect to see a greater willingness on the part of reinsurers to deploy capital, although underwriting discipline will not subside,” he said.

With cedants having now had time to adapt to market adjustments implemented at 1 January 2023, Rousseau said upcoming placement negotiations may play out in a number of ways.

“For example, growing insurance premiums and insurers’ strong results could serve to fund an increase in reinsurance purchasing. Alternatively, we could see insurers capitalise on their intensive efforts to manage portfolio aggregation more effectively, leading to strong solvency, by choosing to reduce the amount of reinsurance purchased and retain more of the frequency-type risks on their balance sheet,” he said.

“It is our view that there will be a greater alignment between the respective needs of insurers and reinsurers at 1 January 2024. What we are seeing is in many ways a return to the core roles of the two markets. As is often the case in a soft market, we saw perhaps a blurring of the boundaries, as reinsurers began providing cover for higher-frequency risks and providing increasing amounts of cover at the lower end of programs.

“Reinsurers are now much more focused on providing cover for higher-severity, lower-frequency risks and are looking to reduce their aggregate exposure and avoid higher-frequency perils.”

He said the unique dynamics of the current market environment meant the current phase will likely be more prolonged than previous market cycles.

“While it is true that such periods of upward rate pressure tend to be shorter in duration, the unique dynamics of the current market environment create the potential to make this period potentially ‘stickier’. The level of uncertainty that we see on the macro-economic environment and in the risk universe could prolong these current conditions,” he said.

“It is also important to recognise that rather than being capacity-led, the current market inflection has been capital remuneration-led. Capacity has been available across most business lines, but at a price. The focus on achieving greater returns for capital allocated was the trigger, as was the case in the insurance market in 2017.

“For today’s reinsurance market, while reinsurers are in a position to deploy capacity, they are only willing to do so where they can achieve a return acceptable to their shareholders.”

Rousseau said this demand for higher returns is also evident in the stance of capital market providers, who are assessing where to allocate capital very carefully.

“Should traditional reinsurers deliver a strong result for 2023, we would expect capital markets to follow on a larger scale in 2024,” he said.