GC’s Becker: Insurers looking towards alternative capital as retentions increase

Rising attachment points on reinsurance programs are prompting insurers to consider alternative capital options to offset an increase in earnings volatility, according to Dan Becker, CEO of global strategic advisory at Guy Carpenter.

Speaking to The Insurer TV, Becker who oversees 600 colleagues across actuarial, modelling and consulting - said increases to attachment points at recent reinsurance renewals had dampened profitability among primary carriers.

“We see increases in attachments and retentions as a bigger factor [than higher premiums] for most carriers,” Becker said.

He said the increase in retained risk was driving up volatility in underwriting profit.

For primary carriers, he said the impact of these increased retentions was particularly pronounced given the macro factors impacting the industry, ranging from economic factors such as inflation, to climate, societal and geopolitical risks.

While capitalisation remains strong across the majority of companies, Becker said profitability remains challenging.

“Even in the reinsurance space, most of the challenge has been at the attachment level. Supply, generally speaking, has been adequate, and companies, more or less, have been able to continue to purchase the limit they need to support their obligations to stakeholders, like regulators and rating agencies. But that attachment level, again, is driving some issues around profitability.”

To navigate some of these issues, Becker said carriers can take steps to underwrite more profitably through modernising pricing approaches, incorporating new models into their business, and reviewing portfolio construction.

“Because they’re no longer able to mitigate some of these risks through reinsurance in the way they have been in the past, the importance of gross underwriting profitability has intensified,” he said.

One opportunity for carriers is to increase their use of alternative capital – Becker noted, for example, that 2023 is already emerging as a bumper year for cat bonds.

“If you look at both sponsor demand, and seller demand, it's been huge. We've seen a record number of new sponsors in the first half of the year,” he said.

Becker said the popularity of cat bonds could be attributed to their positioning away from the more challenging lower layers.

“From a retention perspective, they tend to sit slightly above some of the attritional catastrophe loss activity,” he said.

Despite these challenges, Becker said most US commercial lines carriers will continue to see underwriting profitability, with personal lines carriers also set to benefit as rate changes “start to work their way through the system”.

He said the changing nature of risk has heightened awareness about the need for carriers to be proactive and strategic in their approach to their portfolios.

“That will ultimately drive better behaviour – it will drive more refined and modern approaches to pricing, and it will certainly increase carriers' focus on underwriting more profitably and with more capital efficiency.”

He said the major macro risks – such as climate change and geopolitical uncertainty – presented opportunities for those carriers that think about them in the right way.

“Many carriers are now looking at how insurance can help society work through some of these challenges, either through financing the energy transition, or building new products to help transfer some of these more challenging risks,” he said.