GC: Reinsurance demand and reinsurers’ willingness to deploy capital set to grow at 1.1

Reinsurers will look to deploy more capital in 2024 in an environment of improved rate adequacy while demand for reinsurance increases, Guy Carpenter executives have predicted during a briefing addressing market conditions ahead of the 1 January reinsurance renewals.

David Priebe, chairman of Guy Carpenter, commented that “a new cadence” has emerged in the reinsurance market.

“Heading into January 2024 renewals, we believe demand for reinsurance will grow with reinsurers’ willingness to deploy capital also increasing - although underwriting discipline will not subside,” Priebe said during the virtual media briefing. “Thorough preparation and thoughtful differentiation will enable cedents to adjust their own approach and leverage a range of solutions to transform risk into profitable returns.”

He added: “Reinsurance industry veterans know this significant level of uncertainty is where our sector shines.”

Pent-up demand for reinsurance

Lara Mowery, global head of distribution at Guy Carpenter, discussed how cedants have responded to the evolving market conditions.

In response to loss trends and the resulting challenges in the reinsurance market, many cedants have significantly reshaped their own portfolios throughout the last 18 months. This includes rate increases that are still working their way through portfolios, underlying product adjustments, such as higher insurance deductibles, and managing concentrations.

Mowery noted that, while reinsurers are able to respond fairly quickly within a renewal cycle to revisiting the composition of their own business, it takes time for these impacts to work through the insurance portfolios.

“Cedants have now had more time to begin adapting to 2023 market adjustments and this may play out in a number of ways at January 1, 2024 including cedants funding increased reinsurance purchasing with growing premiums or alternatively mitigating the amount of reinsurance required as a result of more intensive aggregate management,” she said.

Mowery added: “In some cases, cedants’ greater retained risk throughout renewals in 2023 has led to pent-up demand for reinsurance with higher reinsurance pricing and structural requirements on cat programs. Some carriers have also responded by increasing their use of captives, which impacts volatility assessments for 2024.

The executive suggested that loss activity and available capital comprise the two most significant drivers of market behaviour.

She said that incumbent reinsurers appear well capitalised, as evidenced in Europe by high Solvency 2 SST ratios.

Growing capacity has firm return expectation

“The lack of true startup capacity has been widely discussed, but we've noted the bounce back in capacity driven by two sources: new capital raised by existing reinsurers and capital allocations to more constrained segments such as property reinsurance from existing reinsurers,” Mowery said. “In both cases this capital has a firm return expectation in order to continue to participate.”

Profitability for reinsurers is bouncing back, while mark-to-market asset valuation is improving on the equity side and maturing, then being reinvested at higher rates on the fixed income side.

Guy Carpenter and AM Best jointly estimate that the total dedicated reinsurance industry capital is $560bn, an increase of 5.6 percent over 2022 adjusted levels and nearing 2021 totals. Within this, the traditional capital component has increased by 12 percent.

“Just as important to rebounding capital levels is the motivation to deploy capital. We know that management teams and investors are watching shifting market dynamics closely across all lines of business to assess profitability and inform the level of deployment they will support,” Mowery said.

She continued that current information suggests reinsurers are expected to report underwriting profitability for 2023 and earn returns in excess of their cost of capital as results strengthen.

“This implies a sizable capital source to deploy for future growth,” Mowery said. “We estimate that up to $50bn could be added to the composite’s total equity by end 2025 if these projected returns are achieved.”

Investors continue to stress longer term stability of results when evaluating industry opportunities, Mowery said.

“So in addition to raised capital, we expect reinsurers’ improving returns and stabilising equity costs to further increase available capital levels,” she said.

Against this improving capital backdrop, Mowery also highlighted the strong performance of the catastrophe bond market, which experienced a record first half of the year.

At the mid-year point, 41 different catastrophe bonds were brought to the 144A market for approximately $9.2bn in limit placed. This took the total outstanding notional amount to over $37.8bn.

“Moving forward, we expect this positive momentum to remain as reinsurers continue to manage volatility and investors increase activity in this alternative asset class,” Mowery said.

Optimism around retro

Discussing the retrocession market outlook leading into 2024, Mowery said that there is increased certainty around supply to match demand, but reinsurers have remained clear in their intent to attach away from frequency perils and perceived attrition.

“When we look across to property retro and the January 1 2024 renewals, absent of a major loss to retro programs, there is more optimism for some reinsurers and ILS funds in their ability to attract capital to the property catastrophe space, and the retro market will continue to benefit from the underlying improved conditions,” she said.

The executive suggested that retro renewal conversations will include Hurricane Ian loss development as well as 2023 performance.

“We expect to see increased differentiation by markets towards their clients and how the portfolios compared with plans,” Mowery said. “Given previous-year price increases, we expect clients to stress-test their current structures to assess where the optimal value and coverage lies. “

Dorothée Mélis-Moutafis, newly appointed North American broking executive and recently interim CEO of Europe, provided information on global rate developments.

“Pricing and structure conditions have continued to recalibrate from the upheaval that many renewals, especially property, experienced at January 1,” she said. “While we expect the market to remain firm in 2024, negotiations have steadied and order and confidence have largely returned to the sector.”

Mélis-Moutafis noted that the US property catastrophe rate-on-line index increased 35 percent year on year, while the Asia Pacific rate-on-line index increased 16 percent, including mid-year adjustments.

Incorporating these shifts in key geographies, with other regions remaining largely stable from 1 January, Guy Carpenter’s global property catastrophe rate on line index increased to 29.3 percent for 2023, from the 1 January figure of 27.2 percent.

“Extensive and verifiable corrections over the past year are likely to equate to hard, but more manageable renewals for cedants at January 1 as reinsurer appetite is slowly growing in response to price adequacy and supportable structures,” said Mélis-Moutafis.

A stable casualty market expected

Discussing the casualty market, Mélis-Moutafis said that Guy Carpenter expects stability at the renewal, with a watchful eye on macroeconomic factors, social inflation, underlying rate moderation and prior-year loss development.

“It is evident that those cedants who present a clear and proactive underwriting strategy and bespoke approach to limits management are those most able to mitigate reinsurance rating pressures and to secure reinsurance coverage as required,” she said.

Mélis-Moutafis added: “Reinsurers have a healthy appetite for the diversification of these longer-tail lines as they hold or shift away from certain cat segments or geographies.”

The executive added that in the specialty space fears of a lack of capacity have proven unfounded as significant rate increases and repricing brought capacity into the market, “though pinch points remain”.

Responding to a question about how long the hard market can last, Priebe noted that it is a function of supply and demand.

“We are starting to see some capital come in but not nearly at the quantum that I think will dilute the current situation,” he said. “But the results are positive and quite frankly, as we've been talking to investors throughout the world, there's continued strong interest in investing in insurance risk, and so we expect that capital will be coming in.”

He added that the capital is expecting continued discipline.

Also during the briefing, Julian Enoizi, newly appointed CEO of Europe and current global head of public sector at Guy Carpenter, discussed systemic risks and the role of public-private partnerships to mitigate them.

As an example, he highlighted the work of Guy Carpenter and Oliver Wyman in advising the British and Ukrainian governments on how to attract approximately $1trn of investment to fund the reconstruction of Ukraine.