NEWS
The hard market could endure due to its unique drivers
There is reinsurance capacity out there, it just requires a significantly higher closing price, says Laurent Rousseau of Guy Carpenter.
This hard market differs from previous ones in some fundamental ways, which mean it will endure longer than previous favourable markets, Laurent Rousseau, chief executive officer of EMEA and Global Capital Solutions, Guy Carpenter, told Baden-Baden Today.
Rousseau acknowledged that the January 2023 renewal brought a pronounced pivot in market conditions, with significant price increases and adjustments in terms and conditions across virtually all lines. But he highlighted several factors that are differentiating this market turn from previous inflection points.
“First, the inflection happened first in the insurance market, from 2017—previous cycles had been reinsurance-led.
“Second, this time around it is the macroeconomic drivers, such as interest rates and inflation, that have acted as the catalysts for the market turn, accelerating pre-existing re/insurance market factors, which had not been sufficient by themselves to turn the reinsurance market,” he explained.
“These factors include increased loss activity, a rapidly evolving risk environment, and prior-year loss developments in casualty.”
Rousseau continued: “This market turn is led by the need to better remunerate capital, as opposed to resulting from a dearth of capacity. There is reinsurance capacity out there, but it requires a significantly higher closing price.
“The demand for improved returns on capital deployed by reinsurance carriers and capital markets alike has been a key contributor to the shift in the reinsurance market dynamics. Insurance risks pricing has followed the global repricing of financial risks.”
“This market turn is led by the need to better remunerate capital.”
Laurent Rousseau, Guy Carpenter
He says that yet another differentiating factor, because of the above drivers, is the potential duration of current conditions. “Given the persistently high interest rates and inflation environment, coupled with increased uncertainty at the macroeconomic and the risk level, this could serve to prolong this period.”
One consequence of what he calls an increasingly complex and interconnected risk environment, could be an opportunity for the development of alternative solutions and strategic sourcing of alternative capital, he added.
Renewal possibilities
Moving to apply those factors to the next renewal, Rousseau said Guy Carpenter expects the market to remain firm at January 1, subject to there being no major reinsured industry loss events in the interim.
“We would expect to see in some cases an increase in demand for reinsurance and a greater willingness by reinsurers to deploy capital in a disciplined fashion given the fact that rates across most business lines have reached adequate levels,” he said.
“However, cedants may choose to retain more risk given improved overall solvency stemming from considerable efforts to de-risk their portfolios and strong results over recent years.”
Looking at specific business lines, Rousseau expects the upcoming property renewals to reflect rate adequacy across most lines. “While reinsurers may push for additional rate increases, we would expect pricing to be relatively stable when compared to last year’s renewals,” he said.
On the casualty side, things could be different, however. “There continues to be a level of market caution in relation to the casualty market, given the recent loss trends development.
“We want to ensure that all stakeholders in the discussions are speaking a common language.”
“While we expect capacity to be relatively stable as we approach January 1, reinsurers will be closely monitoring prior-year loss activity and the underlying rate environment. Higher interest rates and stabilised inflation should allow market-making, and favour new business profitability.”
Capacity concerns
Rousseau expects reinsurers to continue to focus deployment of capacity at the higher levels of programmes, with availability of capacity at the lower levels remaining challenging.
“Reinsurers will continue to focus on severity and volatility, while insurers would retain more frequency risks. This will likely drive greater interest in developing alternative solutions to address any potential coverage gaps that clients may have,” he explained.
All this makes the role of the broker more important, Rousseau argues, acknowledging that some placement discussions could be challenging. He said the important thing is for all parties to approach negotiations with clarity and transparency and be explicit in their needs, requirements and objectives to remove any potential misunderstanding and reduce any friction.
“In essence, we want to ensure that all stakeholders in the discussions are speaking a common language.”
Guy Carpenter is focused on creating the prime conditions to bring new capacity into the market at 1/1—both traditional and alternative—to deliver optimum solutions for clients, he added.
“Given current market dynamics, we expect there to be increased demand for alternative capital structures to meet the evolving coverage requirements of cedants and to address any shortfalls in traditional capacity at an acceptable price,” he concluded.
Main image: Shutterstock / Angelaoblak
