The balance-of-power in the global reinsurance and retrocession market is shifting towards sellers of protection, over buyers, with rate hardening now potentially set to “accelerate” through 2023, according to analysts at investment bank Berenberg.
Berenberg’s analyst team have been highlighting a steady shifting of the power-balance in reinsurance over recent months, but now they believe the shift towards reinsurance and retro capital providers is becoming “significant”, with more still to come.
“In our view, it is becoming increasingly apparent that the balance of power is shifting towards property reinsurance (and retro) sellers, as opposed to buyers,” the analysts explained.
Typically, in the current hardening, to hard, reinsurance market environment, new start-ups and new insurance-linked securities (ILS) capital would be pouring into the sector.
But as we approach the end of 2022, this isn’t the case.
We believe there are two reasons for this, even as the reinsurance market price environment resets at a higher level.
Both those reasons are down to investors or capital providers and it applies to both the traditional and alternative, or ILS, sides of the markets.
First, investors are likely to (in the main) await evidence that this resetting of reinsurance and retrocession pricing is sufficient.
By this, we mean, sufficient to cover loss costs, costs-of-capital, expenses and to deliver a margin on top of capital deployed or invested, something that hasn’t been seen market-wide for some years now.
The second reason is that investors and reinsurance capital providers are going to want to see that the newly installed rate levels are going to be sustained, at least well-above where they had declined to in recent years, or above the level required to deliver those margins.
There remains a need to demonstrate the profitability of the business-model of underwriting natural catastrophe exposed property business, both across the cycle and over the longer-term.
This need has become especially acute given recent severe loss years, broader inflationary trends and concerns over how climate change could influence losses in future.
Berenberg’s analysts note that the cost-of-capital in general has risen, which is being seen across institutional and private markets at this time.
Alongside which, the analysts believe there is a “structurally lower appetite for natural catastrophe (nat cat) business.”
Which further underscores the need for adequate levels of return to be achieved and also maintained, to develop appetites again and encourage capital back in.
As capital is required, perhaps now more than ever, as a functioning risk to capital chain and insurance, to reinsurance layered (and tranched) capital structure is needed to underpin the industries ability to deliver on its core promise of offering protection.
But the analysts are bullish on what this all means for the future of the market and they feel this ongoing shift of power, to reinsurance and retro sellers, over buyers, means the hardening may be more prolonged.
They explained, “We expect this to result in rate hardening which could accelerate through 2023 as more protection is sought.”
They expect a “step-change in property-catastrophe reinsurance profitability,” which is precisely what investors and capital providers want to hear from the industry.
Capital needs to be compensated for the risk it assumes, while at the same time the industry needs to work to make attaching capital to risk more efficient.
As with rates hardening and a new baseline for price, per unit of risk, being set, the next question the industry has to deal with is affordability and that could drive even bigger disruption, than any shift in the power-balance.