GUY CARPENTER STATE OF THE REINSURANCE MARKET IASA Texas Chapter Fall Conference November 22, 2019 Zachary Wilson Senior Vice President
GUY CARPENTER
STATE OF THE REINSURANCE MARKETIASA Texas Chapter Fall Conference
November 22, 2019
Zachary Wilson
Senior Vice President
GUY CARPENTER 2
GUY CARPENTER OVERVIEW & REINSURANCE BASICS1
2019 US PROPERTY CATASTROPHE UPDATE 2
MARKET TRENDS AND 2020 RENEWAL EXPECTATIONS3
STATE OF THE REINSURANCE MARKETIASA Texas Chapter Fall Conference
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Disclosure
Securities or investments, as applicable are offered in the US through GC Securities, a division of MMC Securities LLC. (“MMCS”), a US registeredbroker-dealer and member FINRA/NFA/SIPC. Main office: 1166 Avenue of the Americas, New York, NY 10036. Phone: 212.345.5000. Securities orinvestments, as applicable are offered in the European Union by GC Securities, a division of MMC Securities (Europe) Ltd., which is authorized andregulated by the Financial Services Authority. Reinsurance products are placed through qualified affiliates of Guy Carpenter & Company, LLC. MMCSecurities LLC, MMC Securities (Europe) Ltd., and Guy Carpenter, LLC are affiliates owned by Marsh & McLennan Companies (“MMC”). Reinsuranceintermediary services are offered through Guy Carpenter & Company, LLC.
This information was prepared by MMCS and/or Guy Carpenter & Company, LLC. (“Guy Carpenter” or ”GC”), the reinsurance brokerage arm of MMC.All statistical tables, charts, graphs or other illustrations contained herein were prepared by MMCS or GC unless otherwise noted. Results fromsimulations and projections are for illustrative purposes only and are based on certain assumptions. Therefore the recipient should not place unduereliance on these results. Past performance does not guarantee future results.
Neither MMCS nor GC is a legal, tax or accounting adviser and makes no representation as to the accuracy or completeness of any data or informationgathered or prepared by MMCS or GC hereunder. Your company should therefore consult with its own tax, accounting, legal or other advisers and makeits own independent analysis and investigation of any transaction, as well as the financial and tax consequences thereof, the creditworthiness of theparties involved and all other matters relating to the transaction, prior to its own independent decision whether or not to enter into any agreements inconnection with any transaction.
This presentation does not constitute an offer to sell or any solicitation of any offer to buy or sell any security or instrument or to enter into anytransaction on such indicative terms. An investment in insurance linked securities is speculative, involves a high degree of risk and should be consideredonly by institutional investors who can bear the economic risks of their investments and who can afford to sustain the loss of their investments.Noteholders may lose all or a portion of their investment. Institutional investors should thoroughly consider the information contained herein.
This document is not intended to provide the sole basis for any evaluation by you of any transaction, security or instrument described herein and youagree that the merits or suitability of any such transaction, security or instrument to your particular situation will be independently determined by youincluding consideration of the legal, tax, accounting, regulatory financial and other related aspects thereof. Opinions and estimates constitute MMCS’sand/or GC’s judgment and are subject to change without notice. In particular, neither MMCS nor GC owes duty to you (except as required by the rules ofthe Securities and Exchange Commission, Financial Industry Regulatory Authority, Financial Services Authority, and/or any other regulatory body havingproper jurisdiction) to exercise any judgment on your behalf as to the merits or suitability of any transaction, security or instrument. The informationcontained herein is provided to you on a strictly confidential basis and you agree that it may not be copied, reproduced or otherwise distributed by you(other than to your professional advisers) without our prior written consent.
This material provides general, educational and conceptual information about certain financial strategies, and does not discuss or refer to any specificsecurities or other financial product. This presentation is not intended as marketing, solicitation or offering any security or other financial product in anyjurisdiction. This material is intended only for sponsors, financial intuitions and qualified investors.
MMCS and/or GC may have an independent business relationship with any companies described herein.
Trademarks and service marks are the property of their respective owners.
The source of information for any charts, graphs, or illustrations in this document is GC Securities Proprietary Database 2019, unless otherwiseindicated.
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Disclaimer
Guy Carpenter & Company, LLC provides this report for general information only. The information containedherein is based on sources we believe reliable, but we do not guarantee its accuracy, and it should beunderstood to be general insurance/reinsurance information only. Guy Carpenter & Company, LLC makesno representations or warranties, express or implied. The information is not intended to be taken as advicewith respect to any individual situation and cannot be relied upon as such. Please consult yourinsurance/reinsurance advisors with respect to individual coverage issues.
Statements concerning tax, accounting, legal or regulatory matters should be understood to be generalobservations based solely on our experience as reinsurance brokers and risk consultants, and may not berelied upon as tax, accounting, legal or regulatory advice, which we are not authorized to provide. All suchmatters should be reviewed with your own qualified advisors in these areas.
Readers are cautioned not to place undue reliance on any historical, current or forward-looking statements.Guy Carpenter & Company, LLC undertakes no obligation to update or revise publicly any historical, currentor forward-looking statements, whether as a result of new information, research, future events or otherwise.
This document or any portion of the information it contains may not be copied or reproduced in any formwithout the permission of Guy Carpenter & Company, LLC, except that clients of Guy Carpenter &Company, LLC need not obtain such permission when using this report for their internal purposes.
The trademarks and service marks contained herein are the property of their respective owners.
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GUY CARPENTER OVERVIEW
5
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Marsh & McLennan Companies at a Glance
Marsh & McLennan Companies is a global professional services firm providing advice
and solutions in the areas of risk, strategy and human capital. It is the parent company
of a number of the world’s leading risk experts, and specialty consultants.
6
Clients in more than
130 countries
More than 60,000
colleagues worldwide
Annual revenue
exceeding $14.95 B
140+ year history
of leadership and
innovation
Dan Glaser
President/CEO
(Oliver Wyman, Lippincott,
NERA Economic Consulting)
Insurance Broker
and Risk Advisor
Risk and Reinsurance
Intermediary Services
Talent, Health, Retirement,
and Investment Consulting
Management
Consulting
Four companies with one purpose, helping clients manage risks and make the most of their opportunities, their capital, and their people
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The Basics – Guy Carpenter Today
1,600clients globally
$40Bin premium
placed
worldwide
More than
3,100colleagues
Revenue of
$1.6BMore than
60Offices
worldwide
Guy Carpenter helps its clients achieve profitable growth with a powerful combination
of specialized reinsurance broking expertise, strategic advisory services, and industry-
leading analytics.
7
We provide advice and solutions to address our clients’ strategic imperatives and strive to deliver superior results for every assignment
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Optimize return on
risk-adjusted capital
RISK
MANAGEMENT SOLUTIONS
• Treaty Reinsurance
• Facultative Reinsurance
• GC Analytics
• Specialty Practices
• Client Services
Achieve long-
term growth
BUSINESS
GROWTH SOLUTIONS• Capital Advisory
• Alliances + Acquisitions
• Geographic Expansion
• New Products + Distribution
• Technology Solutions
• Enterprise Risk Management
• Microinsurance
Full Range of Services to Support Profitable Growth
Strengthen Balance
Sheets to gain a
competitive advantage
• Mergers + Acquisitions
• Corporate Finance
• Alternative Capital
• Ratings Advisory
CAPITAL SOLUTIONS
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Guy Carpenter OverviewSpecialty Practices
GC SpecialtiesLine-of-business experts deliver deep market knowledge and efficient transactions in every
relevant geography to provide clients with an enduring competitive advantage.
GC Specialties
Over 100 professionals & staff
• Unique market insights
• Specialized analytics
• Peer analysis
• Frictionless transactions
• Market Influence
• Agriculture
• Aviation And Aerospace
• Construction/Engineering
• Credit, Bond, And Political Risk
• Cyber Solutions
• Excess & Surplus Lines
• General Liability, Umbrella &
Casualty Clash
• Healthcare & Life
• Marine & Energy
• Mutual Company
• Professional Liability
• Program Manager Solutions
• Property
• Retrocessional
• Structured Solutions
• Surety & Fidelity
• Terror Risk
• Workers Compensation
Reinsurance Basics
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What is Reinsurance?
INSURANCE COMPANY
(PRIMARY OR CEDING COMPANY)
PRIMARY
POLICY HOLDERREINSURER
Insurance for insurance companies
An insurance company, called the primary or ceding company, cedes portions of its premiums
and liabilities to another insurance company, known as a reinsurer
Reinsurance is a transaction between insurance
companies only – the primary policyholder is not
involved
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How Risk Is Transferred Through the Industry
Retail
Clients
Primary
Insurance
Companies
Insurance
Brokers &
Agents
Brokers and agents match buyers with
appropriate insurers, generally receiving a
commission from the insurer or a fee paid
by the buyer
Individuals, business of all sizes and
governments buy Insurance to protect
against all kinds of risk, including property,
liability, life / health, and credit
Sell policies to the original
consumer / business, either via
agents and brokers or directly,
(e.g. over the internet)
Reinsurance
Brokers
Insurance companies amass portfolios of
policies and reinsurance brokers help them
to buy reinsurance to manage risk.
Retrocessionaire Retrocessionaires are companies that sell reinsurance to
reinsurers.
Alternative/
Capital
Markets
Capital market investors, like pension funds, also
assume insurance related risks through
transactions that function similar to reinsurance.
Retail
Clients
Primary
Insurance
Companies
Reinsurance
Companies
Alternative /
Capital Markets
Insurance Brokers
& Agents
Reinsurance
Brokers
Retrocessionaire
Reinsurers, either through a broker or directly,
sell reinsurance coverage to primary
insurance companies
Reinsurance
Companies
Motor Home
CatastropheBusiness
Life & Health
12
EXAMPLES
&/or
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Why Do Insurance Companies Buy Reinsurance?
13
Capacity
StabilityCatastrophe
Financing
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Capacity
14
Capacity
StabilityCatastrophe
Financing
Why do companies want capacity?
• Larger policy limits
─ Insurer may not want to issue a single
policy with a limit greater than a
certain amount
• Premium capacity
─ Regulators often cap the amount of
premium that an insurance company can
write in relation to the insurer’s surplus
(capital)
─ Use of reinsurance reduces an insurer’s
net written premium, enabling the insurer
to sell more policies
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Stability
15
Capacity
StabilityCatastrophe
Financing
Why do companies want stability?
• Volatility may:
─ Affect stock value of publicly traded insurer
─ Alter financial rating by independent rating
agencies
─ Require abrupt changes in approaches taken to
manage underwriting/claim/marketing
─ Lead to insolvency
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Catastrophe Protection
16
Capacity
StabilityCatastrophe
Financing
Why do companies want catastrophe protection?
• A single large event such as an earthquake can
cause losses to many of an insurer’s policies at the
same time
• The accumulation of all these losses may be more
than the insurer is able to pay on its own and
threaten its solvency
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Financing
17
Capacity
StabilityCatastrophe
Financing
Why do companies want financing?
• Provides surplus relief by way of ceding
commission
─ Premium growth = surplus drain
- Immediate recognition of expenses when
issuing policy
- But, premium is only earned gradually
throughout year
- Causes surplus to decrease with each
incremental policy written
– Ceding Commission offsets expenses
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2019 US Property Catastrophe Update
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Market DriversGlobal Significant Insured Loss Activity
19
While insured loss for the first half of 2019 is below average compared with
previous years, Q3 has seen slightly more activity with Typhoon Faxai and
Hurricane Dorian primary contributors.
2019 loss estimates are preliminary and subject to change
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Dallas Tornado Update
20November 21, 2019
October 20, 2019
Insurance Council of TX - $2B
PCS - $2.5B
- Expecting over 30,000 claims
- Part of larger system, weather losses into
OK and AR
- Gap Clothes found 10 miles away
- Largely expected to be a retained event
for HNW Homeowners carriers
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Market DriversGlobal Significant Insured Loss Activity
21
While insured loss for the first half of 2019 is below average compared with
previous years, Q3 has seen slightly more activity with Typhoon Faxai and
Hurricane Dorian primary contributors.
2019 loss estimates are preliminary and subject to change
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Loss CreepHurricane Irma Losses Continue To Rise
22November 21, 2019
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HOT TOPIC: COLLATERALIZED REINSURANCE TRANSACTIONS
GUY CARPENTER 24November 21, 2019
Market DriversAnnounced New Reinsurance Capital 2018 vs 2019
Source: Artemis, Guy Carpenter
2018 H1 totalled $10.5B
2019 experienced a 54%
decrease at $4.8B
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Market DriversTotal Capital Base for Insurance Linked Funds Decreased in 2019
25November 21, 2019
Chart depicts the approximate AUM of the larger specialist managers up to April 1, 2019. Individual fund changes varied
considerably and there are material differences in how managers report their AUMs.
Source: InsuranceLinked
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Unique Features of a Collateralized Reinsurance Transaction
26
At contract inception,
market funds its
“obligations,”defined
as the contract limit
or a negotiated
amount via a trust
account.
A trust document
with a qualified bank
as trustee is
required; bank
requires other critical
documentation.
After expiration, if a
covered event has
not occurred, the
trusteed assets are
returned to the
reinsurer according
to a negotiated
collateral release
schedule.
The reinsurance
contract and/or I&L
incorporates the
funding feature;
negotiated collateral
release schedule
and other
amendments to
contract provisions.
1 2 3 4
Each step can take longer - timing is critical!
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Steps in Collateralized Placement Process
27
If CollateralizedFronted or
CollateralizedParticipation
IdentifyAppropriate
Markets
Program opportunities:
• Private layers • Aggregate • Top and agg/drop• RPP• CWIL• ILW• Cat bond
• Collateralized market database
• Through GC Securities, PropertySpecialty, existing broker relationships
• Obtain written client instruction to access markets
• Negotiate coverage including collateral release language
• Begin Trust
Agreement and Know
Your Client
documentation as
soon as possible
– Standard GC trust
agreement language
being negotiated
with main banks
Evaluate Client Cover Needs
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Coverage Comparison for Property Catastrophe Risk Transfer Products
28
Traditional/Collateralized Reinsurance Cat Bond
Access to CapitalAll traditional reinsurers and most ILS
investors
ILS investors and a small minority of
traditional reinsurers
Pricing* Matching ILS spreads 25% - 40% price reductions in 2013
Timeframe 4 weeks 8 – 12 weeks
Loss Trigger IndemnityIndemnity / Industry / Hybrid /
Parametric
Term Typically 1 year, multi-year available Typically 2-5 years
Loss Reporting / PaymentsBased on actual loss settlement / ability to
pre-fund
Requires claims reviewer / pre-set
payment dates / limited pre-funding
Additional Loss Settlement Cost NoYes, typically for each claims
submission
Counter-Party Risk Reinsurer security/collateralized Collateralized
CommutationNot required for traditional / flexible up to
5 years
Less flexibility; additional premium due
for each extension
Transaction Expense Minimal (Brokerage)Several additional fees spread over
duration of bond
Resolution of Issues Reinsurance case lawInvestor protective securities laws and
case law
GUY CARPENTER 29November 21, 2019
Case Study: Issues with Collateralized Placements
• Recently, an insurance company released collateral after getting an updated
Claims Count in Florida
• The loss then continued to develop, so they asked the collateralized Markets
to return the collateral in order to pay claims
• Given the details of the Collateral agreement, the Markets were not
obligated to return the collateral after the Collateral Release was signed
• Some of the Collateralized Markets made a “Business Decision” to return
some of the collateral
• Others were not so commercial and did not return the collateral, leaving the
Insurance Company with a large Unrecoverable on their Balance Sheet
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2020 Property Renewal Preview
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Industry Headlines
31
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Lloyds Capacity Changes and Decile Ten
32
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What are Reinsurers Telling Us?
33
Based on 2017 to current catastrophe loss activity and increasing scientific reporting,
evaluation of climate change impact is a significant reinsurer concern
Capital remains plentiful but with greater scrutiny on where and how to deploy
Similar to mid-year 2019 renewals reinsurers will look to make underwriting adjustments
based on evolving view of risk
Most reinsurers report they will have similar capacity to deploy year on year
Retro pricing is under pressure and many markets are assessing potential impacts of buying
less cover or increasing spend
Mid-year 2019 renewals experienced program specific differentiation and reinsurers intend a
similar focus at January 1
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The Last Few Years in Review - Property
34
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The Last Few Years in Review - Casualty
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US Property Cat ROL Index
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Reinsurance Market Drivers
1
Capital
• The industry remains well capitalized even after the 2017 and 2018 catastrophes
• Pension fund interest in ILS funds continues, but is more cautious and is shifting between
managers
• The tightening of retro capacity has the potential to reshape reinsurer portfolios
2
Catastrophe Losses
• Catastrophe losses of $85 billion in 2018 (typhoons, hurricanes, wildfires) and catastrophe
loss reserve development from 2017 again challenged underwriting results
• Despite two year cat losses exceeding $230 billion, Reinsurer balance sheets remain strong
3
Mergers & Acquisitions
• Company combinations for a variety of reasons are re-shaping the industry:
China Re / Chaucer
Enstar / Maiden NA
Apollo / Aspen
Arch / Barbican
SCOR / Coriolis
Ren Re / TMR
MS Amlin / Leadenhall
Canopius / AmTrust Syn
Cincinnati Financial/ Beaufort
4
Taxes, Regulation, Ratings
• US Tax Reform drove changes to quota share arrangement to affiliates
• Brexit caused new company formations and/or domicile changes
• Solvency II should increase the transparency of European insurers and reinsurers
• Rating agencies toughen stance on Hedge Fund Re model
37
GUY CARPENTER 38November 21, 2019
2019 Japanese Typhoon Loss Estimates
Super Typhoon Hagibis made landfall on October 12 in Japan as a category-2
passing over the Greater Tokyo Area
CompanyInsured Loss
EstimateNotes
AIR Worldwide $8 to $16bn
Estimate includes insured damage to property (residential, commercial, industrial and
agriculture/mutual), structures and their contents, and automobiles from wind storm surge
and inland flood
RMS $7 to $11bn
Estimate includes property damage and business interruption to residential, commercial,
industrial, marine, and automobile lines, for both the private and kyosai/mutual markets
from typhoon wind and typhoon flood
CoreLogic $7 to 11bn Estimate includes Wind: $2.8 to $4.4bn, Flood: $4.2 to $6.6bn
Typhoon Faxai made landfall on September 9 in the Greater Tokyo Area as one
of the strongest in recent years to strike Japan's capital city as a category-2
CompanyInsured Loss
EstimateNotes
AIR Worldwide $3 to $7bn
Estimate includes damage to property (residential, commercial, industrial, and
agriculture/mutual), both structures and their contents, and automobiles from wind and
storm surge.
RMS $5 to $9bn
Estimate includes damage and business interruption caused by typhoon wind and
coastal flooding to residential, commercial, industrial, marine, automobile lines, and
includes both the private and kyosai/mutual markets
CoreLogic $2.5 to $4.5bnEstimate includes insured loss from wind, storm surge, and inland flooding in Japan.
This estimate excludes losses from marine cargo, CBI, Autos and Crop
Karen Clark & Co $3 to $7bn Return time of a $15bn typhoon in Japan is 1 in 20 years
Typhoons Faxai and Hagibis significantly impacted the Tokyo metropolitan region one month apart at category 2 strength.
Stronger winds in Faxai and widespread flooding in Hagibis both will be material contributions to insured losses. Combined
loss estimates are as high as $25 billion.
GUY CARPENTER 39
Market DriversClaims Development for Costly North Atlantic Hurricanes – 2000 to 2017
This graphic uses data from Property Claim Services (PCS) to show the development of claims (in percentage terms) for a selection of U.S. hurricanes since 2000, starting at 200 days post-landfall and leading up to 700 days. All incurred an ultimate insured cost in the U.S. of more than USD 10 billion. Source: Guy Carpenter, PCS
GUY CARPENTER 40
Market Drivers
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Market Drivers
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Market DriversSignificant decrease in Excess Capacity at June 1
42November 21, 2019
Capacity tightened significantly at the June 1, 2019 US property catastrophe
renewals, both in Florida and on renewals with exposure primarily outside Florida.
Source: Guy Carpenter
148%
132%140%
116% 116% 116%
FLORIDA NON-FLORIDA ALL
2018 2019
GUY CARPENTER 43November 21, 2019
Market DriversDedicated Reinsurance Sector Capital 2012 to H1 2019
While alternative capital dipped slightly through H1 2019, traditional capital grew by
roughly 1.5% for a total increase of 0.5% since year end 2018
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Market DriversAlternative Capital by Source 2013 to 2019
Alternative capital decreased 3% by mid-year 2019 to $92 billion. Markel’s purchase of Nephila in November 2018 is reflected in the shift to Reinsurance Sponsored
Managers
0
20
40
60
80
100
120
2013 2014 2015 2016 2017 2018 6M19 E
Dedicated ILS Managers Reinsurance Sponsored Managers Direct Institutional Investors
GUY CARPENTER 45November 21, 2019
Source: GC Securities Proprietary Database
Risk limit outstanding due to full or partial extension is not included. *144A catastrophe bonds issued as of Nov 7, 2019 excluding private transactions.
ILS Market UpdateState of the 144A Catastrophe Bond Market
Support for 2019 transactions has varied – while some were upsized,
others were downsized or pulled out of the market at this time
GUY CARPENTER 46November 21, 2019
P&C Catastrophe Bond Pricing 2018 v. 2019
Source: GC Securities Proprietary Database (P&C catastrophe bonds status update as of Nov 7, 2019)
Catastrophe bond activity was impacted by the same factors reinsurers tackled when
forming their new views of risk; many transactions were completed at the top end of
initial pricing guidance or above
Following outliers are excluded from trending and not displayed: Atmos Re DAC 2019-1 (Expected Loss 0.45%; Net RoL 4.50%); Sanders Re II 2019-1 Cl B (Expected Loss 1.76%; Net RoL 12.25%)
GUY CARPENTER 47
Global Insurance Pricing Change2Q15 To 3Q19
GUY CARPENTER 48November 21, 2019
U-Shape Market Cycle
Primary Rates
Increasing
Cost of Retro-
Reinsurance
Increasing
Will Reinsurance
Rates Follow?