Reinsurance most exciting near-term, but more rate rises mean more capital

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The reinsurance market is viewed as the most exciting segment for underwriting at this time, but there is a recognition that should rates continue to rise in 2024, then there is likely to be more meaningful capital entry.

This is according to commentary from analysts at J.P. Morgan after their European insurance conference this week, at which major players cited positive fundamentals in the reinsurance market.

The key takeaway of note is that the reinsurance market is expected to remain hard, implying little to no reduction in pricing from the peaks we currently see.

Reinsurance firms are still positive on pricing and terms, feeling these will translate to improved profits, while at the same time the amount of capital flowing in is not seen as significant enough to dent this considerably.

As a result, the analysts from J.P. Morgan are constructive on P&C reinsurers, telling their investor clients they give overweight recommendations for many of the key names in the sector.

Property catastrophe reinsurance is picked out as an area of particularly strong pricing, with executives from leading European re/insurers saying rates are at or near historical highs.

Profitability should be “substantially improved” the analysts believe, something the reinsurance sector will need to live up to, but that we’re already seeing demonstrated in the catastrophe bond fund market, and more broadly across insurance-linked securities (ILS) funds.

So far, the J.P. Morgan analysts do not think capital influx is causing any particular softening effects, not being sufficient.

Although we are seeing catastrophe bond spreads come down slightly from their recent highs.

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“At present, despite significant improvements seen in price, terms and conditions, we have not yet seen material levels of capital flow back to the industry with alternative capital happy to wait for evidence that profitability has really improved before coming back to the industry,” the analysts explained.

Of course, higher reinsurance costs are also a factor for the European re/insurers speaking, but it seems many are happier with their inward rate adequacy and also expect their own premium rates to keep rising.

Executives from Hiscox were particularly bullish on reinsurance, saying it is the most exciting segment near-term after the “seismic shift” in the market.

The firm said it has been able to take advantage of the dislocations that have emerged in reinsurance, as it had retrenched in the preceding two to three years.

The executives said they believe current reinsurance market conditions will persist into 2024, although if prices continue to rise they do expect more meaningful capital inflow.

However, they say they do not expect to see capital inflow at the rate seen in previous hard reinsurance market peaks, because of the broader economic backdrop and yield environment.

While capital may start to flow in more meaningfully towards the latter part of 2023, there are plenty of dynamics still at play to support reinsurance pricing and prevent any significant softening of price, absent a really major capital influx.

While we’re hearing plenty of stories of capital raising success in the ILS market and stories of new start-up reinsurer capital raises being dusted off (again), at this stage these don’t seem likely to drive the quantum of new money that would be required to soak up all of the growing demand and need for protection.

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It could be finely balanced though, come year-end, and while many expect a hard reinsurance market to persist, it may be more of a plateau of pricing, dependent on catastrophe loss activity through the rest of this year.

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