STRAP
Cedants eye scope to negotiate as $50bn in capacity returns
Prices and attachment points are likely to remain stable in 2024, but cedants are likely to look for relaxation on terms and conditions as more capacity comes into the market, says Guy Carpenter’s Randy Fuller.
This year’s 1/1 renewal season is likely to be more stable than 2023’s “tremendous correction” in the reinsurance market, according to Guy Carpenter.
Randy Fuller, the head of the North America Property Centre of Excellence and the Florida segment leader, told AIPCA Today that he expected this year’s season to be “set up for stability” as capacity returns to the market.
But, he said, he expects some adjustments on terms and conditions, in part because as much as $50 billion in capacity is likely to have returned to the market by the end of the year, giving cedants more scope to negotiate changes.
Fuller said: “A year ago at APCIA there was a lot more uncertainty as we headed into the 1/1 renewal season. We had just had Hurricane Ian, reinsurers’ balance sheets were under pressure from investment losses and no-one knew exactly what was going to happen at January 1.
“It turned out we were at the beginning of the hardest market that most of us have ever seen and over the past year we have seen a tremendous market correction and have covered a lot of ground—more change in one year than you might expect to see over several years, all absorbed at once.
“There has been a lot of pain absorbing that amount of change in a short period of time, certainly for buyers of reinsurance.
“But as we set up for this renewal season it positions us for stability because we have made the corrections that needed to be made to bring the market back to a healthy spot,” he reflected.
Fuller added: “We will have stability in pricing, terms and conditions to a certain extent. In the correction we saw, as happens with corrections generally, sometimes they overcorrect and some areas that have overcorrected will probably be addressed at this renewal.
“The risk appetite will remain pretty stable. There was a technical basis for the adjustment on attachment points. Most will stick to their guns on that element.
“But there will be some cases on terms and conditions and pricing where the result of last year’s renewal was more of an opportunistic dynamic than a technical foundation. There will be some situations where those things are revisited.
“It is not a matter of discipline but more a question of whether a particular situation makes sense where this market is now.”
“We have made the corrections that needed to be made.”
Randy Fuller, Guy Carpenter
Capital recovery
Fuller said some terms and conditions could be forced through by reinsurers a year ago because of the lack of capacity in the market in 2022, but “that has changed in a dramatic way”.
He added: “We are in a much better position with regard to capital. We have seen a little new capital come in, $4 to $5 billion. Last year, a big driver of why things got so hard so quickly was not just because we had Hurricane Ian, but we also had balance sheet impacts from the investment losses.
“We have seen that recover to a large extent. We think probably $50 billion of capital has been recovered from those losses, so that is a much bigger piece than any new capital that might come in.”
Fuller said the $50 billion recovery of capital accounted for about 12 percent of the reinsurance capital base.
According to research released by Guy Carpenter and AM Best last week, the industry came close to returning to 2021 levels of capacity after the traditional market shed around $64 billion in capacity in 2022 while the insurance-linked securities (ILS) market was flat with around $96 billion in total.
In 2023, the traditional market clawed back $50 billion to reach $461 billion while the ILS market is expected to grow to a record $99 billion, the research said.
“I am not convinced we need new capital in order for there to be adequate capacity and competition,” Fuller said. “The incumbent markets are pretty well positioned. A lot of the bigger cat companies had been paring back their cat writings in the years leading up to last year and that leaves them better positioned to grow into this market where the conditions are much better.”
Growth for alternative markets
Fuller said he did not expect to see a class of 2024, but noted the class of 2020 which came before the hard market had had the opportunity to grow as rates rose.
He added that Guy Carpenter was aware of at least two new startups which were hoping to launch next year.
But, he said, the reinsurance market had changed dramatically and there was not necessarily a need for the heavily capitalised balance sheet insurers which had been created in previous hard markets. Alternative insurance markets were also poised for more growth, he said.
“The market is very different from where it was 20 years ago,” he said. “You can easily, if you have capital, get behind one of the current markets and get started right away with a ready-built platform and a proven team and everything else.
“The cat bond markets have generally outperformed the traditional market.”
“In this environment it’s much more efficient to go that route rather than to incur all the costs of starting up a company from scratch.”
This included use of catastrophe bonds and other forms of ILS, he said.
“2023 was a record year for cat bonds. The cat bond markets have generally outperformed the traditional market so there are people looking at that as an answer to wanting to play in this space. It’s maybe a more efficient way to do it.
“This could come through the traditional markets as well, through sidecars and other vehicles. Generally ILS, whether through cat bonds or sidecars, or directly with collateralised reinsurers, is probably where we are going to see most of the capital coming from.”
Fuller said he expects to see participation increase in the Florida market in the wake of reforms to litigation.
“We saw appetites for Florida improve in 2023 after the December reforms,” he said. “There was a narrative that people would take a wait-and-see approach to assess whether the reforms were effective before they came back.
“But there were some who believed in it from the outset,” he said.
For those who were on the fence, Fuller said there are strong signs that the reforms aimed at limiting illegitimate litigation are working.
He said suits served to property insurers in Florida had dropped 24 percent through the third quarter and were down 42 percent from 2021.
“We are seeing lawsuits decline pretty significantly and if you talk to carriers, you are seeing a reduction in the frequency of claims on non-cat losses. Non-cat claims are down significantly.
“The reduction in claims speaks to the amount of fraud that was in the system,” he said. “That is exciting to hear when we aren’t yet 12 months out from the reforms.”
Fuller said Florida’s reforms stood in contrast to California, where setting sustainable rates would take some time.
“Florida has been working on its issues for years, and it will take a bit of time for California. We have seen this happen several times before. When politics tries to get involved in insurance regulation it can really mess up a market. That is essentially what has happened in California. They have a long way to go,” he concluded.
Main image: Shutterstock / Bilanol
