Reinsurance market hardening to last through 2023, says AM Best

A flood of fresh capital is unlikely to enter the hardening reinsurance market any time soon because investors remain wary of climate change at a time of rising cost of capital, and so the tough market is set to persist this year, according to an industry roundtable event hosted by AM Best.A flood of fresh capital is unlikely to enter the hardening reinsurance market any time soon because investors remain wary of climate change at a time of rising cost of capital, and so the tough market is set to persist this year, according to an industry roundtable event hosted by AM Best. The 1 January reinsurance renewal saw big increases in the cost of property catastrophe cover and higher retentions for insurers, conditions that would normally be expected to attract fresh capital to the market. However, investors remain cautious, which points to a difficult reinsurance market for the remainder of 2023 at least, the AM Best panellists warned. Reinsurance pricing increased by double digits across almost all lines and most geographies at the January 1 renewal, with property seeing the biggest increases, according to Liz Cunningham, chief executive of Bermuda-based reinsurer Somers Re. Property cat exposed lines saw increases of 50% to 100%, with “corrections” to attachment points and terms, she said. But despite improved pricing and terms at 1 Jan, economic and geopolitical volatility is impacting investor sentiment, resulting in a “cautious approach” from new capital, according to Carlos Wong-Fupuy, senior director of global reinsurance at ratings agency AM Best. While the reinsurance market remains “well capitalised” and with “significant amounts of capital on the side-lines”, investors are cautious about how they deploy that money, he said. The reinsurance industry has suffered from an accumulation of mid-size and smaller natural catastrophe activity over the past six years. This has translated into average claims in excess of $100bn each year. As a result, the reinsurance sector has generated a return on equity of just 4% to 5% at a time when the cost of capital is at least twice as much, said Wong-Fupuy. He predicts that the cost of capital will rise further with current macro-economic uncertainty. Cunningham said capital is more “hesitant” in today’s economic environment. In 2022 a number of players exited or trimmed back on property cat but a number do now see the “market inflection as a turning point and an opportunity”, she said. “Some companies are looking to increase participation in the market,” she added. Wong-Fupuy expects new capital to enter the market in 2023 but he does not foresee a flood of new entrants. “We still consider the market well capitalised… We see lots of interest from management teams about new projects, and there is definitely lots of discussion about that. But caution from investors is still there,” he said. “Now renewals have been completed, and we would expect further increases in rates and terms and conditions for the rest of the year; we will see some new capital come up. But experience tells us that it is very unlikely to be a flood of capital as seen in previous cycles. Most likely it will be something specific and more diversified than a property cat venture,” he said. According to Aditya Dutt, president of Aeolus Capital Management, the market is trying to entice investors at a time of changing monetary policy and uncertainty over natural catastrophes. The reinsurance market has been going through a process of establishing “price discovery” over the past five years, adjusting rates with each year of losses, he said. “Here we are, five years on from 2017, continuing to engage in a process of price discovery. Until we settle on price and an adequate return, it’s difficult for investors – whether traditional or ILS investors – to commit. It’s hard to understand the underlying risk they are accepting, [therefore] it’s hard to price it... Until we convince investors, which is difficult to do, that we have reached pricing equilibrium, its difficult for capital to come back in,” Dutt said. At the same time, the sudden reversal of more than ten years of loose monetary policy and the recent rapid increase in interest rates, adds to the challenge of attracting capital, according to Dutt, whose firm is a Bermuda-based reinsurance and insurance-linked securities (ILS) investment fund manager. “As the cost of capital goes up for everyone, we need to establish that the margin we are able to get from our product is sustainable. And that is hard when we have an economic environment that is in constant flux, and a perception that the risk is in constant flux,” said Dutt. “Until we do that, capital will continue to be somewhat circumspect of this market. This is not a six-month or 12-month process. This is a process of engaging with investors over a longer,” he said. Up until recently, the expectation of long-term low interest rates had supported a “buoyant” ILS market, said Wong-Fupuy. “Now the situation is different. The combination of interest rates and [alternative] investment opportunities, and the perception of risk, has seen the risk premium widen significantly,” he said. Wong-Fupuy warned that the reinsurance industry risks becoming less relevant if it continues to shy away from difficult risks. “The immediate reaction has been to reduce exposures, to withdraw from certain lines of business. That is a prudent and logical approach. But the main challenge for the segment going forward is that those risks that companies aren’t keen on taking are not going away,” he said. “Climate risk is there, cyber is there, and intangible assets and intellectual property is a significant component of the valuation of companies and the economy. So the relevance that the insurance and reinsurance sector has to play in the broader economy is something that requires innovation and creativity,” Wong-Fupuy said.

Reinsurance market hardening to last through 2023, says AM Best

Capital influx unlikely

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