The most exciting market in my career – Guy Carpenter’s Carter

The re/insurance market of 2023 is perhaps the most exciting or dramatic it’s ever been. A heady cocktail of shock pricing, fast-changing emerging risks, a drumbeat of climate-linked catastrophe activity, and a cacophonous context of macro volatility, are all making for interesting times. 

“This is the most exciting market we’ve seen for years and years – probably in my career,” Vicky Carter, Guy Carpenter’s Chairman, Global Capital Solutions, International, tells GR.

For underwriters in particular, huge opportunities go hand in hand with the risks. “The smartest and most opportunistic people in this market will certainly be taking advantage of this situation, and on the underwriting side, why wouldn’t you? Everybody’s waited a long time for this.”

Mad world

The macro context surrounding the reinsurance market has been dramatically escalated by a dizzying array of factors that are at turns totally unrelated and yet dangerously interconnected.

“We’re in a far more volatile world now, and the risk landscape is permanently in flux,” says Carter. “There are so many challenges in the macroeconomic environment, climate change, financial markets, and, of course, the Russia-Ukraine conflict, to name but a few.”

She thinks many insurers are adjusting their books to better face this changeable risk environment.

“Secondary perils, such as wildfire and convective storms, are significant loss drivers, which are happening annually, globally. Look at the extreme and varied weather we’ve seen this year. In Europe, there have been significant wildfires in Greece, as well as those happening in the US and Canada on a regular basis.

“Insured losses are being compounded by inflation and increased value concentration. Climate change impacts are expected to accelerate particularly if the earth’s temperature increases beyond 1.5 degree centigrade,” Carter adds.

Add an increasing number of emerging risk uncertainties, such as artificial intelligence (AI), cyber risks, and intangible assets, then a dramatic shift in the risk landscape is in the offing.

“It’s an exciting place to be but also a risky place to be,” she says. “Look at the development of AI. Things are changing so fast, it’s got huge value in so many different areas, but it’s also got huge potential risks, and in every area people have got to start adjusting to these new risks.”

Pricing shock

Reinsurance pricing will influence insurers’ reviews of their existing books, she thinks, particularly given the surprisingly large increase in the cost of reinsurance seen in the past year.

“Insurers had such a shock on pricing, that they’re having to readjust their portfolios,” Carter says. “What you’re seeing in the insurance market is a lot of reassessment and readjustment of portfolios and Guy Carpenter is working closely with its clients to enable them to achieve their portfolio objectives. And that’s going to ultimately impact reinsurance.”

She traces the pricing shift back to the mid-year renewals of 2022, before the market turn accelerated at 1/1 2023. “It’s unlikely we will see a degree of change as dramatic as that in 2024. That suggests a more settled market,” she says.

This was borne out at the “steady, stable” Japanese renewals in April, and then again for US and other business “renewing fairly smoothly” in June and July. Interesting dynamics continue to play out, Carter thinks.

“Capacity opened up a little bit as we moved through the June-July renewal season. Perhaps people have held back some capacity in anticipation that rates were going to continue to harden further. One or two CEOs and underwriters in the market still think there’s potentially more hardening to come,” Carter says.

“Who knows how the hurricane season is going to play out in the US or whether there are any other significant losses for the remainder of 2023? While there would remain an upward pressure on pricing from inflation, that could be tempered by a lack of catastrophe activity during the rest of the year. Watch this space, but the upward pressure is certainly still there,” she adds.

Available, at a price

Carter thinks that while demand is high and supply has been tightly disciplined among reinsurers, the market is not constrained by capital in overall terms.

“Most reinsurance placements were completed at 1/1,1/4,1/6 and 1/7. Insurers maybe did not purchase as much cover as they would have liked to, but that was more or primarily due to pricing and budget constraints,” Carter says.

“In certain circumstances, there was a lack of availability due to perceived risk. If you consider the sources of capital, the vast majority of capacity is coming from traditional reinsurance, which remains very well capitalised,” she explains.

Reinsurers’ disciplined show of risk appetite has been for the large part driven by the need to meet shareholder expectations and cost of capital requirements, Carter suggests.

“This is probably one of the main reasons we’ve seen significant rate changes in 2023. Although pricing has been increasing since 2017, shareholders cost of capital hadn’t been met. Hence, they have been taking a hard stance, to ensure that that does not happen again,” she says.

Catastrophe bonds have fared better in meeting investor expectations than collateralised re, she notes.

“If you look at alternative sources of capital, we’ve seen capital enter the cat bond market, that product has performed as marketed to investors, and the risk-adjusted returns that are met have been attractive relative to other investment opportunities,” Carter says.

“Collateralised re has been trickier, due to loss activity. Although now with higher premiums being paid, this can attract alternative capital and its cost of capital could be exceeded now,” she says.

“The one-year risk-reward payoff could meet investors requirements but investors are far more cautious now, avoiding perils that they deem too risky, such as California wildfires or German floods. And if they do participate, they want those perils very well defined. There’s much more scrutiny around the wordings of those perils,” Carter adds.

Showing quality

Disciplined pricing, terms and risk selection could be crucial to attracting any fresh capital waiting on the side-lines, whether into traditional reinsurer side-cars or collateralised re structures, from cautious third party capital investors who have suffered catastrophe losses in recent years.

“Investors like the diversifying nature of the asset class, but what they do not like are surprises, particularly if they’re required to deliver regular mark-to-market valuations,” Carter says.

“Different capital requires very different metrics. So, if you look at private equity, that’s much more aggressive in terms of the return on equity required, in the mid-teens and upward, and they tend to have a three-, five- or seven-year horizon.

“Pension funds, on the other hand, have a much longer-term view of their investments, and their return on equity requirements are substantially lower, but they also want much more stability. So, the dynamics vary for the different sources of capital, and where it’s coming in from. At Guy Carpenter, we are also seeing a lot of interest from family offices in the US looking for investment opportunities,” she adds.

One thing in common for all these investors is a strong desire to see evidence of high standards of underwriting discipline before investing, following years of weak pricing and some previous investors’ burned fingers.

“The one thing that we’re seeing is that these sources of capital are being far more selective now, in where they invest,” Carter says.

“They look for very strong management teams who have demonstrated a strong track record of profitability. The other key thing for investors is alignment of interest. They want to ensure that they are investing with an entity whose strategic objectives are in synch with their own. That’s a key area of focus at Guy Carpenter, as we seek to match capital to the most appropriate carrier.”

Another trend common to many financial markets is the rise of Environment, Social, Governance (ESG) investing.

“One of the things we’re also seeing is that a lot of investors are putting a percentage of their funds aside for ESG-related opportunities. If there’s an opportunity related to ESG, there tends to be more investor interest and excitement around it. It’s interesting to see that develop,” Carter says.

London Bridge 2

In addition to her capital role at Guy Carpenter, Carter is also the first female deputy chair of Lloyd’s. Conversation moved on to London Bridge 2, the Lloyd’s market’s new mechanism – working on a protected cell company (PCC) basis – for investors to be able to invest more flexibly.

“I think London Bridge 2 absolutely demonstrates that. It provides much more flexibility and options for transferring risks,” she says. “Lloyd’s is very focused on enhancing accessibility to investors. Some criticisms usually levelled at Lloyd’s are that it’s too complicated, or too expensive, or that it takes too long. What the executive team has done on London Bridge 2, in response to that, is to focus on how they can remove barriers that have been in the way of investors, to make it more attractive.”

The London Bridge 2 PCC is incorporated in England and supervised by both the Prudential Regulation Authority and the Financial Conduct Authority.

“What’s interesting is that London Bridge 2 has a Boardand that Board is the supervisory team, which is able to approve transactions. So they don’t need to go for further regulatory approval – which is a huge step forward. It will simplify the process and speed up transactions hugely,” she says.

Each transaction is entered into via the single cell, of which its liabilities are ringfenced for insolvency purposes. London Bridge 2 allows the issuance of both preferential shares and debt securities to fund each cell’s obligations.

“It provides the ideal access to specialty insurance classes, where Lloyd’s remains the centre of specialty insurance and the global leader. I don’t think people appreciate enough that Lloyd’s is one of the most cost-efficient places to underwrite specialty insurance,” Carter says.

“The inter-availability of capital across multiple years is not replicated anywhere else, so it’s unique in that sense. When you post capital at Lloyd’s, that capital can be used over multiple years, and it will only have to be increased if the volatility of the syndicate increases, or obviously if there are losses. It’s a great place from an investment perspective, and the value from that investment can be accelerated hugely through that inter-availability.”

London Bridge 2 represents a major step forward for Lloyd’s in its bid to rival alternative re/insurance centres, she suggests, allowing the market to play to its traditional strengths while gaining a new advantage.

“We’ve already seen a lot of investment coming through London Bridge 2 as people start to appreciate the value it brings. I think it’s really exciting because they’ve done an outstanding job, and it demonstrates how Lloyd’s continues to adapt and evolve in a changing landscape,” she says.

“If you talk to the investors who made some of the recent transactions using London Bridge 2, they didn’t appreciate until they got to understand it how valuable it was, and they’re absolutely invested in London Bridge 2 for the future,” Carter adds.

She relishes her deputy chair role at Lloyd’s, which she assumed in September 2021 after first being elected as a member of the Council of Lloyd’s in 2019. As with the other members of the council, she inhabits her Lloyd’s role in an individual capacity, rather than representing Guy Carpenter.

“I love it,” she says. “What I find really interesting is being able to see the vision of the executive team, and then to work with them to educate the market on that vision and how Lloyd’s continues to evolve.”

She thinks that sometimes Lloyd’s can get a bad rap, with people quicker to point out the re/insurance market’s challenges , rather than the benefits that are derived from it.

“I don’t think people fully appreciate the value that comes out of Lloyd’s; things like the whole area of ESG and the variety of interesting new innovations and products coming through the Lloyd’s Lab. We’ve seen things like the Black Sea Grain Corridor, and insurance for IVF come out of Lloyd’s. I’m proud and honoured to have spent my career in and around this market.”

The golden goose

Wanting to attract investors, navigate major losses, but also to maintain hard market pricing momentum, all makes for a delicate reinsurance market balance. Demand remains high and the hard market is expected to continue at the next 1/1 renewal.

“At Guy Carpenter, we are seeing that there remains an appetite for further reinsurance purchasing. Absolutely, given the inflationary pressures, which on their own should help to sustain pricing,” she says.

“However, if the rating adjustment seen to date provides outsized returns relative to investors’ cost of capital, then inevitably more capital will be attracted to the sector, and temper any further rate increases. It really depends on what happens next, but for the short term we don’t see that happening,” Carter continues.

While nobody has a crystal ball, as of early September, to predict the current hurricane season’s claims, Carter has an eye on the future market cycle that, sooner or later, will inevitably follow. The interesting changes will come when the market levels off and starts to soften, she thinks.

“This market cycle will be interesting to watch. The duration of the cycle will definitely be driven by how long the reinsurance market maintains its discipline and remains focused on meeting investors’ return expectations,” she says.

“What will differentiate companies, will be how they manage that downturn – whenever it comes – because that’s when you have to be truly disciplined, to ensure that you maintain the expectations of investors and return capital,” Carter adds.