Reinsurance capital contracted in H2, but some inflows seen in December: GC

Reinsurance capital levels experienced additional downward pressure through the second-half of 2022 according to Guy Carpenter, but the broker also highlighted some new capital inflows in the final month of the year.

Dedicated reinsurance capital contracted in 2022, the reinsurance broker said today.

Having reported back in August that, through the first-half of the year, traditional dedicated reinsurance capital had fallen by a projected 8% to $435 billion, Guy Carpenter’s report today suggests that figure fell further still through H2.

During H2, “the rise in interest rates and continued risk of recession has caused asset values to deteriorate further, creating additional downward pressure on capital levels,” Guy Carpenter explained.

The broker has not given a new estimate for the levels of traditional capital available for the end of year renewals, but it has also suggested new inflows have been seen, which in part may refer to collateralized capacity that emerged.

Through the autumn months, Guy Carpenter said, “there was limited new capital inflow.”

The reasons for this were varied, with investors seen to be holding back “amid continued catastrophe loss,” while at same time risk-free rates were rising, their own assets under management were moderating and they also exhibited “a desire to assess the market transition at January 1.”

But, as the January 2023 reinsurance renewals moved towards their completion, the broker has explained that, “Capital did start to move more freely into the sector in December as the degree of market correction became clearer.”

Back in that August forecast, Guy Carpenter, working with rating agency AM Best, had forecast that third-party reinsurance capital, so largely that deployed in insurance-linked securities (ILS) funds, vehicles and structures, was forecast to grow 1% this year.

Given the impact and losses caused by hurricane Ian in late September, it seems unlikely that will have been the case, with additional ILS collateral trapped due to that storm.

But, as we reported last week, we were told that pockets of successful capital raising from investors have been seen in recent weeks, while our sources also said some reinsurance markets have shown increased appetite to deploy capital for the renewals.

The clear hardening of reinsurance pricing, at the same time as a tightening of terms, has almost certainly attracted some fresh capital inflows to capture the property underwriting opportunity at the 1/1 renewals.

Guy Carpenter’s commentary released today seems to confirm all of that and this new capital has likely played a relatively significant role in helping to narrow some gaps in the property catastrophe market, as well as in retrocession renewals.

The broker had also implied that supply and demand may have turned out to be better matched than had been anticipated expected, as inflation driven demand did not materialise to the degree expected, partly due to the higher cost of coverage, as the year drew to a close.

As more commentary emerges at the start of the new year, we expect some of these inflows will become clearer, as well as the role they have played in helping brokers complete more of the renewal placements for their clients.

Also read: Most renewals largely completed at client issued structure & price: Guy Carpenter.

Read all of our reinsurance renewals news and analysis here.