Speaking at Guy Carpenter’s virtual market briefing ahead of the virtual Monte Carlo Rendez-Vous, Lara Mowery, global head of distribution, said the lessons needed to be applied in other sectors.
“COVID 19 has generated an increased awareness and need for reinsurance mechanisms built across a spectrum of public-private partnerships,” Mowery said. Less than 1 percent of the estimated $4.5 trillion global pandemic-induced gross domestic product loss for 2020 would be covered by business interruption insurance, according to The Geneva Association, she added.
“Pandemic insurance has suffered from limitations of both supply and demand. The payouts, while sporadic, can be so enormous that they dramatically exceed insurers’ capacity to bear them; and it’s always hard to persuade a company to buy insurance that protects against something that hasn’t occurred on a global scale in 100 years,” she said.
This was now being addressed, but other areas need the same focus. “There are over 40 country-level discussions about the establishment of a pandemic public-private partnership solution in progress, but it’s important to note that the protection gap is not limited to pandemic risk.”
Environmental risks are one key area where more work is needed.
“COVID-19 hasn’t increased sensitivity to addressing the ‘what if’ of tail risk and the urgent need for coverage clarity across all aspects of a loss before it happens,” Mowery added.
“Some drivers of uncertainty are dissipating; primary rates are stabilising.”
Lara Mowery, Guy Carpenter
Uncertainty persists
While the outlook for the economy and industry was increasingly optimistic, many challenges from the pandemic remain, according to Mowery.
“Distribution of vaccines and vaccine efficacy have sparked a rebound of consumer confidence in stark contrast to the low sentiment exhibited during the spring of 2020,” she said.
“However, persistent pressures are continuing to drive a level of uncertainty in the market. The world is now grappling with the delta variant of SARS-CoV-2, ongoing supply chain issues, changing workforce dynamics, inflation concerns, natural catastrophes, ransomware attacks and geopolitical turmoil.”
In a challenging market, however, re/insurance continued to show resilience, and the economic upturn and capacity had restrained rates.
“The sector saw continued firming in pricing trends driven by factors including the continued escalation of social inflation and expectations of COVID-19. Midyear placements, however, indicated moderating increases in average pricing due to the strong capital position of the sector and general economic rebound.
“Firming market conditions created an opportunity for new entrants into the insurance and reinsurance industry,” she said.
“Looking ahead to the January renewals, many are encouraged even as we are closely watching recent losses. Some drivers of uncertainty are dissipating; primary rates are stabilising; and ample traditional, as well as alternative capital, is bolstering the sector.”
“Concerns about exposure from secondary perils and climate change were offset by abundant capacity.”
Sebastian Cook, Guy Carpenter
Property capacity remains
On property lines, Sebastian Cook, managing director, Guy Carpenter’s head of London and Europe, reported that the US Property Catastrophe Rate-on-Line (ROL) Index increased by 6 percent for renewals from January through July, approximately half the increase over the same period in 2020. In Asia, it was about 5 percent.
“Concerns about exposure from secondary perils and climate change were offset by abundant capacity and the effect of compounding rate increases and a strong appetite for growth,” Cook said. Nevertheless, underwriters largely maintained underwriting stability, he added.
Many of the factors, including new capacity and previous rate increases, would continue to be true in the future.
“However, we are early in the loss estimation programme with Hurricane Ida, and there is remaining runway on the year,” he warned.
In Europe, too, mid-year renewals had enjoyed continued significant stability, reflecting the supply of capital available to cedants. Rising increases in estimates of losses from recent European floods have them at up to €10 billion ($11.8 billion).
“Secondary peril losses of this nature highlight the opportunity the reinsurance sector has to remain a risk transfer mechanism of choice for clients who are exposed to natural perils risks,” said Cook.
“The sector is well-positioned, with sophisticated modelling capabilities and an annual renewals process that allows for considered calibrations of programme structures and premium levels.”
The strong recent performance of European portfolios and the diversification that the region offered should mean oversupply of capacity was expected to continue, he added.
“Currently, a measured per-client response from reinsurers on loss-affected programmes remains a probable outcome for 1/1.”
“A growing number of reinsurers are exploring this market.”
Shiv Kumar, GC Securities
Alternative capital
Capacity is being boosted by increasing alternative capital, according to Shiv Kumar, president for GC Securities.
“The 144a catastrophe bond market is on track to have a record issuance year,” he said. “In the first six months of 2021, we saw $7.9 billion in new bond issuance via 27 different transactions for 26 unique sponsors.”
Robust growth in 2020 and the first half of 2021 saw cat bonds climb to $31.9 billion by mid-year: 35 percent of the $90.6 billion of alternative capital in the market at the end of 2020, Guy Carpenter estimated.
“A growing number of reinsurers are exploring this market as an efficient substitute for retrocessional capacity through aggregate industry index-based structures,” Kumar added.
Overall, alternative capital at the end of June was estimated to have increased 3.5 percent from the start of the year.
Main image: Shutterstock / Everett Collection
