GC’s Hochberg: Market “inflection point” driving need for more capital solutions

Current market dynamics, namely the upward shift in attachment points, are driving greater demand for capital solutions, with Guy Carpenter’s Ed Hochberg saying the industry “is at a pretty interesting inflection point” as cedants look to manage increasing levels of volatility.

Speaking to The Insurer TV, the broker’s head of global risk solutions said the level of volatility has never been greater.

“Between inflation, social inflation, political uncertainty and all of the risks that are out there, ceding companies still need to manage this volatility, despite the fact that the traditional [reinsurance] market is not so willing to expose itself down in the more attritional layers,” Hochberg explained.

“But [cedants] still have to manage that volatility and stakeholders still expect companies to manage that volatility and deliver a predictable result,” he added.

“And so it becomes very important to find different solutions to approach that problem, and that's where we come in.”

In terms of the solutions, cedants are looking for both “prospective and retrospective” options. Turning first to retrospective solutions, Hochberg said there have been several approaches.

“We've been involved in placing a lot of net quota shares, where carriers need to manage their capital positions and the amount of leverage they're taking on. And we've been able to construct sensible transactions for both parties.

“We're really looking now at more aggregate solutions, and how companies can work with reinsurers to find a place where the point of economic risk transfer will make sense, and yet help companies manage the volatility that they're experiencing.”

But Hochberg added that it’s not been easy to find that “optimal point”. However, his view is that there is more interest from markets to come up with solutions.

Unlocking capital from prior years

Hochberg also flagged the relatively under-utilised opportunity in unlocking capital from back years and redeploying that on a go-forward basis.

“When you think about that – not so much a carrier's average cost of capital, but what's their marginal cost of capital – if they can deploy that capital that they freed up from their back book and write something that has a 30 percent return on it; well, the opportunity cost of not doing that is 30 percent,” he said.

“And so we're seeing a lot of companies making that decision right now. And so that's another source of trying to a) manage the retained volatility on your balance sheet already, and b) you're also unlocking capital on your back book to try and buffer the amount of risk that you're taking on net going forward,” Hochberg added.

Much of this restructuring around the way capital is being put to work is down to a dramatic change in market dynamics, which has seen substantial increases in pricing, a tightening of terms and conditions and a general upward shift in attachment points by reinsurers.

In respect of the latter point, Hochberg is hesitant to describe it as “a new normal”, but said: “We're in a place right now, where risk takers are just not willing to expose their capital at that level. And I don't see that changing any time soon.”

He added: “I think it's a function, in many respects, of a disconnect in expectation between the risk transferor and the risk transferee. And so we're at this inflection point and it hasn’t quite settled out yet.

“I don't think that carriers are necessarily looking at it thinking we're satisfied with where we are right now. And some of them, frankly, can't afford to take on the kind of volatility that they've been left with. And so they are having to seek out other solutions.”

Watch the 10-minute video interview with Guy Carpenter’s Ed Hochberg to hear more on:

  • The need for other risk transfer solutions and what these look like
  • Unlocking capital and making it work harder
  • Trends in the legacy market
  • Outlook on size of legacy transactions