Market conditions favour cedants, but a pricing readjustment is under way

Given the current robust capital position of the reinsurance industry, market conditions remain favourable for cedants. As reinsurers and the capital markets adjust their risk assumptions, a period of readjustment is under way—and cedants’ loss history is becoming increasingly important.

That is the view of James Nash, chief executive of Guy Carpenter’s International division, who told Monte Carlo Today that many buyers are basing their buying strategy on added value, as opposed to price only.

“The mid-year renewals saw adequate capacity being made available to meet buyer demand, but there is no doubt that market conditions have tightened in the aftermath of the 2017 and 2018 losses,” Nash said.

“Reinsurers and the capital markets are adjusting their risk assumptions following the extensive loss creep experienced after virtually every major loss during this period, coupled with the accumulation of losses from non-peak perils—in particular wildfire,” he said.

“We saw meaningful price corrections in Florida, in Japan, and in the retrocession market. This period of readjustment is driving a much more considered approach by capital providers and reinsurers to capital deployment.

“Reinsurers are applying stringent cedant scrutiny, with loss history and overall performance becoming increasingly prominent factors in how capital is deployed. Should any further shocks in the latter part of 2019 be experienced, we can expect to see prices reflect that loss activity.”

Nash stressed that one of the positives of the 2017/2018 losses was that reinsurance was able to demonstrate its effectiveness as a mechanism for limiting earnings volatility, strengthening its position as a stabilising force during times of uncertainty.

This helped stimulate greater insurance demand, with a number of buyers looking to increase the amount of premium ceded to the reinsurance market.

“I would add that price is not the only factor driving coverage decisions,” Nash said.

“What buyers are seeking is value and that spans many different attributes, from consistency of pricing and capital robustness of the reinsurance carrier, through to the relevance of the reinsurance product to their evolving coverage needs, and the overall scope of cover.”

He admitted that a mixture of factors—including the losses experienced in 2017 and 2018 and the market-wide repercussions with regard to loss creep, issues regarding model credibility and non-peak loss accumulations, as well as uncertainty regarding weather patterns and climate change—has caused capital providers to pause and consider how best to deploy capital.

“We expect to see an evolution in how alternative capital seeks to access risk in the market,” he said.

“Despite a marginal decline in capital inflows as parties reassess their risk assumptions, capacity at the mid-year renewals was sufficient to meet demand, although there was clear evidence of an adjustment in underwriting assumptions in loss-affected areas.

“Tightening market conditions are leading reinsurers to be more selective in how they deploy their capacity, reflecting an approach more akin to that of a sophisticated stock picker than that of a tracker fund, as they absorb the hard lessons of recent catastrophe-impacted years.

“In a broader context, it is clear that the nature of risk is changing. Accordingly, how we view risk must similarly develop,” he concluded.