Balancing act

Ahead of 1 January, buyers can look forward to a healthy and differentiated reinsurance market with abundant capital, although reinsurers will seek to hold the line on pricing discipline and terms and conditions, says Charles Whitmore, president, global accounts at Guy Carpenter.

How has the value proposition for reinsurance changed in recent years?

As we head towards the 1 January 2022 renewals, the value proposition for reinsurance as a capital management tool remains as strong as ever.

Cedants are increasingly turning to reinsurance to not only manage their capital more efficiently, but also as means of freeing up capital currently sitting on the balance sheet to support legacy risk.

In the firming insurance environment, that capital can be alternatively deployed as carriers look to take advantage of some of the superior underwriting returns available. In recent years, cedants have increasingly prioritised the purchase of reinsurance to help manage earnings volatility and, in particular, cat volatility within their retained portfolio. We are continuing to see that imperative among buyers.

Where are you seeing the most demand for reinsurance coverage currently?

While demand for reinsurance is reasonably constant year on year, there are certain areas that will see increased buyer appetite at renewals – underperforming classes that have suffered surprise losses, and secondary perils such as hail, flood and wildfire that are causing large retained losses to insurers and surprise losses to reinsurers.

One of the major themes going forward will be around providing coverage for perils which are under-insured and new risks not currently covered – particularly pandemic risks and climate and weather volatility.

Guy Carpenter is investing heavily in its ability to react to these types of risks through the creation of public-private partnerships to close the protection gap and this will be an area of special focus for us going forward.

Which classes of business will see the most challenging renewal negotiations?

One area which will continue to be very challenged at 1 January renewals and beyond is the cyber market – due in large part to the ongoing frequency and severity of ransomware attacks.

The underlying insurance product is undergoing a significant restructuring process, which will not only necessitate significant rate increases but also changes to the coverage in terms of deductibles, co-insurance and risk management.

This period of re-education is an important process for both insurers and reinsurers if the industry is going to be able to underwrite cyber sustainably, and is likely to continue into 2022.

What changes to terms and conditions are likely to appear at this renewal?

While the last few renewals were characterised by reinsurers’ requirement to introduce new communicable disease exclusion clauses following the onset of Covid-19, the industry has also been working on trying to reduce the wide spectrum of these clauses to just a few examples, in order to make choices more straightforward for our clients at 1 January. And in the wake of a spate of European floods that took many carriers by surprise we also expect there to be an ongoing dialogue at renewals about hours clauses for reinsurance coverage of this and other weather perils.

How does Guy Carpenter view the market at 1 January and where can you offer the most value to clients at renewals?

We see a healthy and differentiated market characterised by abundant levels of risk capital, where reinsurer appetite will remain strong, but where reinsurers will have an interesting balancing act to maintain pricing discipline and terms and conditions against the excess of capital over demand.

While we anticipate some robust conversations with the markets we are optimistic about the deals that we can achieve for our clients.

With cedants also benefiting from a greater choice of types of reinsurance capital available to them, helping our clients to optimise their reinsurance buying strategy will centre on making sure that the most appropriate type of capital is matched to individual cedant risk and exposure profiles.

You can also view this article in the first weekly edition of #ReinsuranceMonth, which was published on 1 September by The Insurer and is available to download for free at theinsurer.com/reinsurance-month/weekly-editions.