New entrants plug capacity gaps at January reinsurance renewals

Rates increased more moderately at the recent January reinsurance renewals than perhaps expected on the back of a generally hardening insurance market. Sufficient reinsurance capacity plus a few new players plugging some gaps helped ease pressure while reinsurers focused on claims uncertainty instead of strict rate discipline.

Rates in the primary insurance market have hardened significantly in the past year, particularly in directors and officers (D&O) liability risks and cyber with sometimes double-digit increases. This has prompted expectations of a considerable correction of reinsurance rates at 1/1. 

Rate movements

While prices accelerated compared to previous years, they did less than some experts had expected. Global property reinsurance rates for example were up 6%-7% at the last January renewal. In the US increases were slightly higher at 5-10% while in other international regions rates ticked up 4%-5%. 

These increases follow a year of above average numbers of natural catastrophes which caused approximately USD76 billion of insured losses in 2020, according to Fitch Ratings (opens a new window). The hurricane season has been more active than in recent years and wildfires have caused significant damage in California. Man-made losses accounted for USD7 billion of claims in the past year. The Beirut port explosion triggered claims worth 1.6 trillion Lebanese pounds (USD1.1 billion) by 8 January 2021, according to data from the Lebanese Insurance Control Commission (opens a new window). Global large catastrophe losses were 25% above the long-term average in 2020. 

Negotiations for some casualty portfolios were challenging, particularly D&O and contingency, driven by claims and litigation expectations. Reinsurers also addressed the uncertainty in the market regarding Covid-19 and cyber by including tighter terms and conditions (T&Cs) for communicable diseases in contracts along with more exclusions and lower limits. 

The UK’s Supreme Court ruling (opens a new window) on the Financial Conduct Authority (FCA) business interruption test case was only released after the 1/1 renewals, but it has added costs for insurers that may partially be passed on to reinsurers. In the US however, courts continue to mostly decide in favour of insurers in Covid-related business interruption claims, limiting the cost in that jurisdiction. Nevertheless, a lot of uncertainty remains, for example regarding the Olympic Games in Japan (opens a new window). If cancelled, this could result in considerable insurance and reinsurance losses. 

A quickly firming cyber insurance market continues to be challenging from an underwriting perspective. 2020 was a very active year for cyber-attacks with the so-called SolarWinds hack (opens a new window) causing widespread concern as it compromised numerous US government departments and thousands of public and private sector entities around the world.  

Rates in retrocession rose more moderately compared to the previous January renewal. Retrocession pricing was up at around 10%-15%; much less than at 2020 renewals when the market experienced some capacity constraints. Reinsurers retained more risk at the 2021 January renewals. Due to lower demand, supply held up. Peril wordings in retrocession were tightened and now require “named perils” as opposed to broader terms, generally avoiding the wording “included but not limited”. 

Moderate rate increases happened despite concerns that significant amounts of capital could be trapped in insurance linked securities (ILS), a major source of retrocession capital. Catastrophe bond issuance broke records in 2020, both in terms of the number of transactions and the total value of issuance, according to the Artemis Deal Directory (opens a new window)

Sufficient capacity

There was no lack of reinsurance capital in most lines at the 2021 reinsurance renewals, with total volumes at levels comparable to previous years at around $415 billion. New capacity of around $20 billion was added by existing players that raised new funds, as well as funds from new players, investments in insurance-linked securities (ILS), and sidecars. 

Among others, Convex, the specialty insurance and reinsurance company founded by Stephen Catlin added capacity to the market. The company wrapped up 2020 raising USD1 billion (opens a new window), a move that brought the total amount raised in the 18 months since its launch to USD2.7 billion. More recently, Convex secured further $500mn, bringing the total raised to USD3.2bn.

Officially launched in early December, 2020, Vantage Risk participated in the January renewals for the first time. The start-up led by industry veterans Dinos Iordanou, non-executive chairman, and Greg Hendrick, CEO, was buoyed (opens a new window) by a $1 billion equity capital investment from the Carlyle Group and Hellman & Friedman.

Innovation

New technology platforms are offering opportunities for insurers to better analyse and manage their risk exposure. Lockton Re has, for example, developed SAGE (opens a new window). The platform shows insurers more options to build reinsurance structures. It also creates more transparency regarding the risk exposure, making it easy to view, understand and interact with the different reinsurance structures.   

Such an analysis generates financial metrics that allow insurers to identify the best-performing reinsurance structures, improving the outcome of risk transfer transactions.  

Summary

Because of uncertainty around the economy, reinsurers remain concerned about a low interest rate environment squeezing their investment income as well as premium income. Potential Covid-19-related losses that haven’t been reserved properly is another concern. With claims cost likely to continue going up, particularly in the US social inflation is another matter that will drive renewals throughout 2021. Natural and man-made catastrophes can rapidly change the reinsurance environment, but reinsurance capacity is likely to remain available. Instead of insurers trying to close gaps in their cover it is more likely that reinsurers will offer capacity in certain areas, taking further pressure off insurers’ balance sheets. Despite plenty of available capital, it is of course not available at any price. 

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