...in both the London and US markets, the epithet that is destined to be attached to the 1.1 reinsurance renewals is disappointing.
As reported yesterday, the US cat renewals now look set to yield rate movements of around +10%, while European cat is closer to the 5% mark. Retro too is coming in on the low side, with pricing likely to end up somewhere in the teens.
The same dynamic seems to be playing out in other markets, and there is talk too that pricing is decelerating through the renewal.
And as previously reported, the remediation and rate-on-rate secured by the primary market is pushing ceding commissions higher on some US casualty deals, as reinsurers look to increase their exposure to business with improving projected combined ratios. (See rational "Casualty reinsurance – Rational competition".)
Reinsurance sources are somewhat deflated by the direction that things are taking in what is proving to be the latest of late renewals, with a little of the mood of 2018 returning when renewals serially disappointed following 2017’s brutal cat losses.
But what did people really expect?
When rate rises started to accelerate and become broad-based earlier in the year – with all boats finally rising rather than market or client-specific increases – the world looked very different.
There was far more uncertainty around the macroeconomic outlook and the worst-case scenario for the industry was much worse.
The Covid-19 loss was still being talked about as a possible $80bn-$100bn event, with fears of a major property BI component and scope for heavy losses from lines as diverse as trade credit, mortgage, D&O, E&O, medmal and workers' comp, as well as the contingency and travel losses that crystallised early.
But there were also a range of other factors at play. A more drawn out recession seemed possible, potentially with a second stock market crash. And many scenarios would have included a longer path to normalisation through vaccines.
We were also looking at predictions of an above-average wind season, and many expected ILS to be seriously distressed with the retro market locked up by bitter fights around collateral release.
The whole atmosphere was further characterised by a risk-off mentality as boards and management teams wrestled with multi-focal uncertainty, stressing stewardship over risk-taking.
Layered on top of this was an air of inevitability around a major pricing correction in reinsurance based on the read-across from rapid gains in primary lines and retro.
But all the developments since the summer have tended to point in the other direction, with many of the stressors easing and much of the uncertainty lifting.
First, the Covid-19 loss has not developed in line with the bear case, and with only $76bn of cat losses in 2020, the sector has not seen the capital destruction needed to correct the supply-demand imbalance.
Now, crucially, the game is still being played here – there is no final score, and material uncertainties remain around third-party losses and outstanding BI litigation.
But the base case at this stage does not include runaway property BI losses and punishing multi-billion losses across each of the lines that were on the early watchlist, and even if these losses emerge they will be reserved over multiple years. Combined with an above average but manageable cat loss year, and capital at the end of Q3 was broadly flat, down just 2.4%, according to Guy Carpenter and AM Best.
Related to this, the most downbeat predictions for the ILS sector – both in terms of a run on the bank and a wholesale locking of capital – have failed to materialise, with outflows in most cases manageable and cedants more pragmatic than expected on rolling over capital to facilitate retro renewals.
And then there is the "get-out-of-jail-free-card" on frequency, raised early by sister title Inside P&C and now more widely appreciated, with the runaway severity that was tearing its way through the US casualty market also checked by disruption to the court system.
Second, the insurance industry has proven itself highly resilient in the face of the crisis, contributing to a recovery in confidence within the sector.
Demand has held up well, underscoring the non-discretionary nature of insurance and the sheer scale of government action to prop up distressed businesses.
Cashflow crises have also not emerged at the brokers.
The industry has successfully executed the pivot to remote and hybrid working.
And it has also been highly attractive to investors, with incumbent and new players raising around $11bn of new equity and more like $20bn when net new debt/hybrids are included.
Third, the macro backdrop has been better than expected – both economically and in terms of vaccine development – pointing towards a relatively rapid path to normalisation.
The US stock market has recovered from its March nadir and reached new highs.
US unemployment failed to reach the 20% predictions, topping out at around 15%, and dropped below 7% in November. GDP in the US surged 33% in Q3. And alongside this, early Covid-19 vaccines have produced remarkable results and are being rolled out already.
In summary, these conditions created an environment in which enough market participants had both the dry powder and the risk appetite to chase growth, putting a lid on rate rises.
Broking sources reel off examples of reinsurers looking to grow in the renewals, from the likes of scale-ups Fidelis and Convex; to sleeping giants like Chubb Tempest Re; franchises under new management like PartnerRe; Bermuda's finest RenRe, Arch Re and Everest; and pure start-ups like Conduit, Ark Bermuda, Vantage and Inigo. (Different broking sources name different names depending upon their geographies or lines of business, and there is no science to this until we have Q1 numbers, but these are amongst the most frequently mentioned names.)
By contrast, the list of reinsurers beating a retreat and heavily re-underwriting their book – the secondary market's equivalents of AIG, Lloyd's and FM Global for the primary market in 2019 – are strictly limited, with brokers returning time and again to Swiss Re’s changed risk appetite in US casualty treaty.
But at the end of the day there is a reason that carriers are pressing ahead with growth strategies.
Steady advances across all geographies and lines, with even good clients paying more, and much-improved economics on quota shares, may be disappointing given prior hopes and the action in primary lines, but under the circumstances, it is not clear it is a bad outcome.
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