David Priebe, chairman of Guy Carpenter, expects to see a further $3.5 billion to $7.5 billion of capital enter the industry before 2021, either in the form of reinsurance start-ups or as part of the relaunch of existing entities.
Speaking to Artemis during the start of the official renewal season negotiations, he said a ‘Class of 2020’ was already starting to emerge.
“Between two and five groups are actively working on a launch and their focus is predominantly on addressing the market dislocation and unmet needs of companies, as well as access to the specialty markets,” he said. “New companies are gearing up to deliver a differentiated solution, leveraging technology and data to respond to evolving customer needs.”
Among the potential cohort of new entrants is SiriusPoint, the merging of Sirius Group and Third Point Re. Third Point is also backing new Bermuda-based excess casualty and professional liability MGA, Arcadian Risk Capital, launched by industry veteran John Boylan.
Priebe said around $28 billion of capital had entered the re/insurance industry in recent months, with circa $15 billion dedicated to the P&C and reinsurance sectors. “I would anticipate we’ll see a further $3.5 billion to $7.5 billion of additional capital come in, in the form of a newco or an existing operation which has been almost retooled as a newco.”
While uncertainty surrounding the magnitude of COVID-related claims is exacerbating pricing trends, he said that currently the pandemic appears to be more of an earnings event rather than a capital-related event.
It is not a true hard market, thought Priebe, in the sense that capacity is available, albeit at a higher premium and more restricted terms.
“We clearly have a decreased interest rate environment and reinsurers are having to put more risk against their own equity capital,” he said. “As such you’re going to see higher cost of capital built into the pricing of the product.”
“We are seeing hardening across all lines of business and we anticipate that trend will continue at 1 January.”
At this stage, existing and new capacity coming into the market is “sufficient” to support demand from cedants, but there will not be an excess amount to mitigate the upward pricing trends, he thought.
“We’re seeing a number of reinsurers willing to expand their position and provide greater levels of capacity at the right price and terms and conditions.” said Priebe. “And we are likely to continue to see support from the alternative markets, particularly the more formalised 144A cat bond market where the product is more clearly defined and understood and has performed quite well.”
“We’re also seeing reinsurers open to differentiating how they deploy capacity, price and coverage based on individual cedants, in terms of the quality and scope of the business being offered,” he added.
Priebe said the role of the reinsurance broker had never been more important and that intermediaries needed to be able to “properly differentiate and position their client” in order to secure the best deal in the hardening market.
He thinks cedants will continue to seek a blend of both traditional and non-traditional reinsurance capacity at renewal, but acknowledged there was “increased value in having a rated balance sheet”. However, once the current uncertainty surrounding COVID-related claims has passed, he thought the collateralised space would continue to once again expand.
“Clearly investors have been frustrated by a number of things,” said Priebe. “They certainly understood the nature of cat loss but they were frustrated by the development that occurred around Irma and some of the surprises in terms of the size of loss compared to modelled outcomes in 2017, 2018 and 2019.”
“And then you have a COVID-19 situation, which has added further complexity. Are they going to be impacted by losses or not? And all during that time we’ve had various periods of trapped capital.”
At this stage it is unclear how much capital within the collateralised reinsurance market would be trapped at 1 January, but Priebe pegged it at up to $4 billion.
“In the grand scheme it’s a meaningful amount, but not insurmountable in terms of where the market is at in terms of a trading-forward situation.”
Retro capacity will be available at 1 January, he said, but there is likely to be a shift away from aggregate programmes towards per-occurrence coverage.
“It will continue to be a challenging market,” he said. “We’ve seen a number of carriers step up see the opportunities on the retro side to deploy more capital.”
“We think that net, the amount of retro capacity available and number of providers will be relatively similar in 2020 but somewhat of a different construct, being more per-occurrence than aggregate.”
For some retrocession buyers, the pricing may drive decisions to retain more risk on their own balance sheets.
“If retro pricing is at a level that doesn’t make sense for clients to purchase the protection they will just manage their portfolio differently to achieve the proper balance,” said Priebe. “We are already seeing reinsurers, in anticipation of a changed retro market, repositioning their portfolios to better manage gross and net.”