Even before the COVID-19 crisis, the reinsurance market was facing an increasingly challenged operating environment. Shifting views of risk, a lack of new capital inflows, higher loss cost trends and deteriorating loss experience led to tightening market conditions at January 1, 2020 renewals.
Successive years of losses, sustained prior-year hurricane loss creep (Hurricane Irma most prominently; but also Michael) and growing concerns over social inflation (assignment of benefits-linked issues) and climate change had already altered reinsurers’ views and appetites for peak zone exposures.
Reinsurers were therefore already reevaluating pricing adequacy and exposures at risk, particularly in Florida and other hurricane and wildfire-exposed zones, and expectations were set for further tightening at mid-year due to the volatility of the local market and constrained retrocession capacity.
All these trends have become more pronounced since the onset of the COVID-19 crisis. Furthermore, a confluence of new headwinds associated with the pandemic, such as a global recession, even lower interest rates and investment returns and higher costs of capital, have added to the challenges faced by carriers and entrenched positions further.
As a result, deployable capital among both traditional and alternative markets tightened at the June 1 renewal. Third-party capital inflows into collateralized reinsurance and sidecar vehicles especially have slowed significantly, as investors assess the uncertainty associated with COVID-19 and prepare for the possibility of further trapped capital (compounding losses sustained over the last three years from a succession of destructive catastrophes and subsequent creep).