Guy Carpenter: Many cedants leveraged casualty to complete “tougher” property placements at 1.1

In an interview with The Insurer TV, Guy Carpenter executives David Priebe and John Trace identified the wide range of views on inflation and many buyers leveraging their casualty placements to get their property programs completed as two trends to emerge from a “nerve-racking” 1.1 renewal.

Speaking on the latest episode of Leading Voices, Guy Carpenter chairman Priebe described 1.1 as a “very challenging and nerve-racking renewal”.

“Renewals were late but were ultimately orderly once cedants’ terms were issued,” he said.

“As we expected, reinsurers maintained underwriting discipline, and outcomes reflected a healthy but evolving market which was bifurcated between non-loss-impacted and loss-impacted programs.”

Priebe reported that reinsurers in many cases adjusted their risk appetite and pricing thresholds for certain lines of business and geographies.

Drivers of this included macro issues such as climate change, core inflation, social inflation, continued underlying positive rate change across most lines of business, and the evolving frequency and severity of catastrophe losses.

Guy Carpenter North America CEO Trace added that “in the end our clients’ programs got done and the capacity was there, granted at different terms depending on the different scenarios”.

Guy Carpenter and AM Best estimate total dedicated reinsurance capital at $534bn, up 2.8 percent from year-end 2020.

Ample capacity drives orderly casualty renewal

Trace highlighted “ample capacity” for casualty business at 1.1.

“I would say that one pronounced play in this market at 1.1 was the fact that many cedants were levering their casualty placements to get the tougher or more challenged property placements done,” Trace commented.

“All in all it was a really orderly market on the casualty side, and in the end it worked out well for clients and reinsurers.”

Trace said this is a turnaround from a few years ago where it was property placements that were being leveraged to get casualty placements completed.

“It is interesting how in less than a four-year period of time the dynamics have shifted,” he said.

“There is a lot to be said for reinsurers trading across the platform. At any given renewal period some lines are going to be more attractive than the others, but those things tend to change rapidly over time.”

In a report on the renewals, Guy Carpenter highlighted that continued positive underlying rate movement and underwriting discipline drove quota-share ceding commission increases ranging from flat to up 1.5 points for excess casualty and flat to up 2.5 points on financial lines.

The reinsurance broker reported that financial lines benefited from the healthiest reinsurer appetite, with cyber aggregate being the most challenged. For cyber, rate improvements were viewed as an offset to ransomware concerns, making flat ceding commissions common.

Trace noted a rapid change in the cyber market as a result of insurers responding to ransomware losses through actions such as pulling back limits deployed and introducing sublimits.

“On the quota share side we actually had new reinsurers looking to come into the market to support on a quota share basis,” he said of the cyber market.

“Certainly there is some aggregate capacity pullback but there are others that have come in and in the end there was enough capacity to get the aggregates done.”

Trace added that he thinks aggregate cyber capacity will be constrained for the rest of the year.

Inflation key issue for property renewals

For property, Priebe noted more market appetite on the non-loss impacted layers.

“Capacity was more constrained on the lower layers, aggregates and multi-year and property per risk frequency areas, particularly if loss impacted,” he said.

Priebe added that reinsurers were assessing risk appetite as well as the inflationary impact.

“There were many issues discussed during the renewals process and inflation was one of the key issues and the most technical part of the negotiations, particularly during the quoting stage as there is a wide range of views on that,” he said.

Priebe continued: “When insurers were providing validation that the inflationary adjustments were already being well reflected in their rate modifications and insurance-to-value calculations, increases ultimately experienced minimal additional impact due to that factor. So the key was individual cedant differentiation, which was apparent for both loss- and non-loss impacted accounts.”

Guy Carpenter reported that non-loss-impacted property business was generally flat to up 7 percent at 1.1, while loss-impacted business was up 10 percent to over 30 percent.

The Guy Carpenter Global Property Catastrophe Rate-on-Line Index increased 10.8 percent year-on-year, with the largest regional increases being in Europe.

The reinsurance broker said that the property renewal process ran up to 14 days behind typical timing, driven by shifting risk views impacting pricing models and capacity allocations, uncertainty around trapped capital/loss estimates and a very late retrocession renewal.

Priebe described the retro market as “clearly the most challenged” area of the market, particularly for aggregate contracts.

“It really resulted in clients having to think about the structure of their program and accepting increased retentions. And that led to a greater prevalence of occurrence structures where capacity is more readily available,” Priebe said.

In view of some of the more constrained capacity, the executive said global reinsurers found loss-index based, multi-year, multi-region, multi-peril aggregate coverages available in the cat bond market especially attractive.

Looking ahead to how the 1.1 renewals will influence the April and mid-year placements, Priebe commented that differentiation will be the “key to success”.