With just weeks left until the end of the year, it remains to be seen exactly how much private equity (PE) is raised and what impact this will have at the upcoming renewals, but the current environment suggests we might see some decoupling between traditional reinsurance and insurance-linked securities (ILS) structures.
The ongoing impacts of the global Covid-19 pandemic on an already firming re/insurance market suggests it’s going to be an interesting January 1st, 2021 renewals season.
On the final day of the inaugural Prospectus 2021 conference, a new annual reinsurance and ILS event from Artemis and Reinsurance News, the audience heard from three industry experts on negotiations for the key 1/1 renewals.
Participants highlighted that in spite of Covid-19 and the unprecedented effects of wide-spread remote working owing to government enforced lockdowns around the world, the reinsurance renewals have started in an orderly fashion and in fact, have perhaps been more constructive than in the past.
This year, as with previous periods of market dislocation, a fair amount of private equity has been raised in order to capitalise on the hardening reinsurance market environment and to shore up balance sheets.
There’s been much debate across the industry around what influence raised funds will have at the renewals and whether it will serve to dampen rate momentum gained through the year. Whether it’s just boosting the sector’s capital base, or simply filling holes from losses and potential gaps in reserves, for some.
In light of this uncertainty, panellist Adam Szakmary, Director of Underwriting, Bermuda, Hiscox Re & ILS, offered some thoughts on the current PE raise environment.
“I think by its very nature, private equity having a longer-term view on their return expectations, means that they may be a bit more patient on how they deploy. I think that’s potentially a positive aspect now,” he said.
“I don’t think we’re looking at massive holes in our capital. Through the half-year I think I’ve seen figures of only about 3% down on a global basis, and ILS slightly down more. So, it’s not a large hole to be filling. We’re not looking right now, without understanding the full extent of Covid, that 2020 is going to be a capital event,” continued Szakmary.
He went on to explain that the management teams of either scale-ups or new businesses, have pretty good underwriting ethos’ and solid track records.
“So, I don’t expect they’re just going to follow back to the last 10 years of soft structures, which we know has increased loss cost in our market. So, although price has gone up, we’ve also had loss costs going up and we want to increase margin. So, I don’t expect them necessarily negatively impacting our industry, right now,” explained Szakmary.
The session, renewal negotiation update, also featured Lorenzo Volpi, Partner, Leadenhall Capital Partners LLP, who provided the audience with a view from the ILS side of the market.
Volpi expressed a desire for the market to maintain discipline ahead of the renewals and throughout the coming months. Adding that today, his firm does see capital coming in and is in a good position in terms of continually expanding its assets under management (AuM).
On PE, “it will be interesting to see how they will behave,” said Volpi. “Maybe, as Adam says, they will be patient and it will take time for them to deploy.
“It’s going to be similar to 2017 / 2018 renewals, in the sense that we still need to see what’s happening. Who knows whether there is a lot of capital coming in at the very last minute. We have a decent pipeline, we already closed some investments. But usually we start quite early, as we really want to be able to be flexible in terms of when to start pitching the business and maybe lock-in some renewals.”
He continued to state that the market might also see some decoupling between retrocession, primary reinsurance, catastrophe bonds, and industry loss warranties (ILWs), suggesting that some structures, or points in the value-chain, may have more attractive pricing and as a result return-potential, relative to others.
“And, that’s where we are slightly more opportunistic as an ILS manager. Having different types of investment markets, and the ability to have conversations with investors to time the opportunity as well.
“But, I’m also very curious to see how these dynamics will shape as we get closer to 1/1. We saw that from Covid, obviously the cat bonds were trading below par for reasons not related to natural events, and that for us was a good opportunity to raise slightly more money for more cat bond-type of investment.
“So, again, a very dynamic approach and in our case, we have the capital. We think that the market should be a hard market, and you should get rewarded. But, we’ll see how things develop,” said Volpi.
With conditions turning more favourable for sellers at the renewals, undoubtedly, some areas of the marketplace are going to be more hotly contested than others.
Discussing just this, fellow panellist Julia Chu, Chief Risk Officer (CRO) at Markel Corporation, offered the audience some views on where the most intense debates might occur at 1/1 from a buyer’s point of view.
“The areas probably with more unknowns, where it’s difficult to quantify the risk, will probably be hotly contested. Such as cyber cover, or clash cover and those types of things. A lot of the time it’s because there’s not really very mature modelling behind it, and the capacity and supply go with – it’s a hard market, it’s soft market,” she said.
“Another area is public entities. If we think about the social environment we’re in, it’s a tough market to be in. So, I would say that’s another line of business I would be concerned about.”
To watch every session on-demand please visit the Prospectus 2021 website.