Reinsurers deployed 12% more traditional capital in the run-up to Jan. 1 renewals as the market responded well, with reinsurers maintaining pricing and underwriting discipline, according to reinsurance broker Guy Carpenter.
The year 2023 looks to be profitable for reinsurers, the broker said in a statement. Return on capital is exceeding reinsurers’ cost of capital, as projected average returns are nearing 20%.
Dedicated reinsurance capital, calculated by Guy Carpenter in partnership with AM Best, rebounded in 2023 with strong underwriting and investment earnings and the unwinding of significant mark-to-market investment losses that hit the sector in 2022. The 2023 estimate of traditional dedicated reinsurance capital is $461 billion, a 12% increase from the initial year-end 2022 level.
The broker said capital growth was driven by existing reinsurers with no start-up class of 2023, differing from past years that followed a major market correction.
Alternative capital is estimated to have increased 3.7% to $100 billion net. Overall, dedicated reinsurance capital rose 10% from the initial 2022 year-end estimate.
“The Jan. 1 market reflected more balanced trading conditions providing cedents improved opportunities to achieve their objectives while maintaining key reinsurer relationships,” Dean Klisura, president and chief executive officer, Guy Carpenter, said in a statement. “Technical discussions were essential to reinsurers’ increasing appetite and capacity allocations.”
In general, capacity ranged from adequate to ample for completion of programs across classes where price and structure thresholds were met, including where additional demand materialized, Guy Carpenter said.
Market improvements led to a smoother Jan. 1 renewal compared with year-end 2022, the broker said, while adding there were still geographies and segments that faced challenges reaching market-clearing pricing and structure.
Jan. 1 renewals saw a more consistent trading rhythm in the property market, with capacity deployment outside of frequency-exposed layers “and more heavily loss-impacted segments showing meaningful bounce-back, including on new business where reinsurer activity increased measurably,” the broker said “Markets remain sensitive to pricing, attachment point and overall structure adequacy, but with terms and conditions that were borne out of the demonstrable corrections made throughout 2023.”
Guy Carpenter said the catastrophe bond market had a record year in 2023 as 69 different bonds were brought to the 144A market, totaling more than $15.2 billion in limit placed. Of that, $415 million includes cyber limited placed, taking the total outstanding notional amount of property/casualty and cyber catastrophe bonds placed to an all-time high of more than $41.3 billion.
Total insured large losses for 2023, an aggregation of events in excess of $100 million of insured loss, are $94 billion, including Hurricane Otis, the Turkey earthquake, New Zealand floods and cyclone and U.S. windstorms. This preliminary estimate is expected to rise as more information becomes available, Guy Carpenter said.
Early discussions in the renewal process in areas such as strike, riot and civil commotion; terror and cyber led to material placement improvements, according to Guy Carpenter.
Global property catastrophe reinsurance risk-adjusted rate changes averaged from near-flat to a single-digit rise for non-loss impacted and up 10% to 30% for loss-impacted programs, with a wide range of outcomes around these averages, Guy Carpenter said. Pricing pressure was greatest at the lower ends of programs, with any risk-adjusted decreases near the upper portion of placements, reflecting the adequacy of minimum rates-on-line and sufficient capacity.
“Property retrocessional capacity was available and not constraining reinsurers’ risk appetite, in sharp contrast to this time last year,” Guy Carpenter said. “Price improvement generally occurred in middle to upper layers, retention levels largely held steady despite growth in underlying portfolios, and terms were more consistent within contracts.”
In casualty lines there was pressure on pro rata ceding commissions as well as excess of loss pricing.
“While negotiations were nuanced and bespoke, capacity was ample once market clearing terms were met,” the broker said.
For the January renewals, reinsurer Scor SE anticipated taking advantage of the hard market by generating new business at attractive margins, Chief Executive Officer Thierry Léger earlier said.
Scor intends to grow its P/C business higher than planned at January 2024 renewals to benefit from the favorable conditions, Chief Financial Officer François de Varenne said at the time. The effect of this move on capital generation will be seen in the fourth quarter and next year’s first quarter, he said.