“Historically, traditional reinsurers increase their premium rates after industry catastrophe events in order to replenish capital and attract new capital, with the goal of reaching overall premium rate adequacy and restoring returns on equity to levels more consistent with what is expected of equity capital,” David Priebe, Vice Chairman at Guy Carpenter, explains. “However, GC Securities has found that significant pricing increases will be difficult to sustain for short periods because of the inflow of new capital that typically follows catastrophe events. Alternative capital is already making contingency plans with funds created so that they can inflow new capital rapidly post-event. The difficulty in sustaining price increases means that premium rate adequacy is even more critical in soft markets when capital is abundant. (Re)insurers need to evolve by reassessing business models for more efficient allocation of risk to capital sources.”
“GC Securities envisions an environment in the future where segmenting sources of capital to different risk profiles of a risk transfer program may improve efficiency for cedents and capital providers,” Cory Anger, Global Head of ILS Origination and Structuring at GC Securities, states. “It might be most efficient for traditional reinsurers to focus on working reinsurance layers where claims departments can be leveraged for loss frequency layers and alternative capital to focus on non-working severity layers where they are best able to absorb low frequency, severity losses at the lowest cost of capital.”
Cedents’ willingness to open the accessibility of their entire risk transfer program to all capital sources is also a key factor in determining pricing efficiency and minimum premium rate levels. “Many cedents would like to see minimum premium rate barriers lowered,” says Ms. Anger, “but another way of achieving pricing efficiency is to open reinsurance programs to all sources of capacity instead of limiting ‘all sources access’ to only select risk transfer layers. Open access to all (re)insurance and retrocession program layers is critical for avoiding the situation where less competitively placed reinsurance layers subsidize the premium rates on ‘all sources eligible’ competitive risk transfer layers.”
Ms. Anger further states that the ability to lower minimum premium rates for remote high severity loss layers is affected by the continuum pricing level to risk level relationship across the entire risk transfer program in addition to the specific layer’s pricing to risk level ratio. If the competition among risk transfer capacity sources results in all layers pricing lower, then alternative capital may be able to justify lower minimum premium rate pricing from prior levels.
Mr. Priebe concludes: “The unique collaboration of Guy Carpenter brokers and GC Securities professionals provides clients with agnostic advice regarding risk transfer sources. Guy Carpenter places and accesses risk with all types of capital sources as we advise clients through this emerging segmentation phase that we expect will benefit cedents and capital sources.”
*Securities or investments, as applicable, are offered in the United States through GC Securities, a division of MMC Securities LLC, a US registered broker-dealer and member FINRA/NFA/SIPC. Main Office: 1166 Avenue of the Americas, New York, NY 10036. Phone: (212) 345-5000. Securities or investments, as applicable, are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd. (MMCSEL), which is authorized and regulated by the Financial Conduct Authority, main office 25 The North Colonnade, Canary Wharf, London E14 5HS. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMC Securities LLC, MMC Securities (Europe) Ltd. and Guy Carpenter & Company, LLC are affiliates owned by Marsh & McLennan Companies. This communication is not intended as an offer to sell or a solicitation of any offer to buy any security, financial instrument, reinsurance or insurance product. **GC Analytics is a registered mark with the U.S. Patent and Trademark Office.