Capacity will meet cedent needs at Jan 2021 reinsurance renewal: GC

While capacity and the availability of it has been cited as a key driver of reinsurance rates in this current firming market environment, broker Guy Carpenter said it expects capacity will meet cedent needs at future renewals, as it saw it to in June this year.

Reinsurance broker Guy Carpenter says that the market continued to function well at the recent June 1st renewals.

While reports show that rates rose significantly, while anecdotal reports suggest numerous issues with filling programs and securing all the coverage that cedents needed, this wasn’t purely a capacity availability issue it seems.

Not every cedent secured the reinsurance protection they wanted in June, with numerous reports of shortfalls in program placements and now certain programs coming back to secure top-ups and features such as RPP’s, many had suggested that the denting of insurance-linked securities (ILS) capacity had been a reason for this.

But it seems that changed risk appetites of reinsurance capital providers in general and an elevation in the cost of reinsurance capital may have been more important drivers here, than any specific lack of capacity.

Ever since the Covid-19 pandemic broke out, we’ve reported that the cost of ILS and reinsurance capital has increased and return expectations have been raised.

This has been evidenced through the recent renewals, by the rate increases and also the shift back towards simpler and more transparent structures and away from aggregates and cascading program features.

Guy Carpenter said that, “While June 1 renewals were challenging, capacity ultimately came together to meet cedents’ needs and the market continued to function well.”

Also saying that, “Similar outcomes are expected at July 1, and looking further ahead to January 1, 2021.”

Which all suggests that the real issue that drove any shortfalls or perceived lack of capacity, is appetites, a realisation of the true value and cost of capital, as well as increased perception of risks and emphasis placed on cedent performance.

“The reinsurance sector has shown itself to be well versed at navigating market-changing events, and the overriding message following June 1 renewals is that the market remains well positioned to support insurers through the current period of uncertainty and volatility,” Guy Carpenter continued.

For the rest of this year though, the broker warns that loss activity and in particular the hurricane season could be a driver for reinsurance market dynamics at next years renewal.

On top of the impacts of the Covid-19 pandemic, Guy Carpenter warns that any other major loss event could be enough to push 2020 towards being a year of record insurance industry losses.

That suggests a $150 billion to $160 billion loss year with just one major hurricane landfall, or other catastrophe loss in the region of $20 billion to $30 billion of insured losses.

With more capacity flowing into the market all the time, through capital raises, and new start-ups expected for the January 2021 renewals, the likelihood is that capacity will continue to be sufficient to meet the needs of renewing cedents.

Even if we do see a record year of insurance market losses, the effect this will have on firming rates should be sufficient to ensure the capital inflows increase as well, all of which suggests the market will remain able to service cedents protection needs, unless something particularly significant were to happen in the meantime.