The upcoming January 2021 reinsurance renewals are expected to be lengthier and more complex, as a range of factors play into negotiations, according to reinsurance broker Guy Carpenter.
While new capital is entering the market, rates are increasing and on the investment side asset values have recovered to a degree, the expectation is that uncertainty over COVID-19 loss development, concerns over longer-tail lines of business and adverse development in some quarters of reinsurance could all contribute to making this January 2021 a more challenging renewal season.
Even before the COVID-19 pandemic came along the insurance and reinsurance industry was facing a range of challenges, Guy Carpenter explains.
The industry was left “grappling with the implications of the first globally systemic insurance loss,” the broker said, with fears of significant industry losses, financial market volatility affecting the asset side, retrocessional market dislocation and significant trapping of insurance-linked securities (ILS) fund capital.
But the mid-year reinsurance renewals were completed with all covers placed and sufficient capacity made available and now as we look towards January 1st, Guy Carpenter notes that “some areas of uncertainty are diminishing.”
The need for sustainable underwriting returns is driving rate, with underlying insurance profitability critical for a sustainable market across both insurance and reinsurance.
Market developments since the mid-year have been more positive, with capital being raised and rate indications pointing to the first hardening in years.
“January 1 renewals are likely to be complex, but the market is signaling that it is ready to respond,” Guy Carpenter believes.
However, given the backdrop, the broker does believe that January 1st renewal negotiations are likely to be “lengthier and more complex” than renewals seen in recent years.
There’s certainly a lot more to discuss at this point in the market’s cycle and against the backdrop of COVID-19, while the renewed focus on terms and conditions, to provide more predictable coverage and loss exposure, all adds up to more negotiation being required.
“The January 2021 reinsurance renewals will be difficult as market participants seek to reposition themselves to deal with increased uncertainty,” Guy Carpenter explained.
Adding that, “The current reinsurance market is uncertain; reinsurers are being cautious; and social inflation, adverse development, extreme weather and Covid-19 are all continuing issues.”
On the ILS market side, Guy Carpenter believes that the alternative capital market will “evolve and adapt more broadly as capital seeks new ways to access risk.”
In retrocession, the reinsurance broker sees, “Increasing activity and interest both from new capital and from existing rated balance sheets looking to deploy new capacity into the market.”
While the January renewals are expected to be challenging, cedents are in the main going to find their needs met by the market it seems.
Some restructuring of programs will be required, while certain layers of coverage may not be available at an economic level of pricing anymore. But overall, the vast majority will find their needs satisfied. They just might need to negotiate longer and harder than recent years and ultimately pay more for their protection.