A generational market

Howden Tiger’s David Flandro examines market conditions as this year’s Baden-Baden meeting begins.

The reinsurance sector remains in its most acute phase in a generation. Property catastrophe rates on line spiked by 37 percent at 1 January 2023, with cumulative increases exceeding 50 percent over the past 18 months.

Even more significantly, retentions and attachment points have risen to the point where cedants now retain 10 percentage points more in expected losses than they have done, on average, since 2000. As the renewal season moves into full swing, the durability of this hard market is front of mind both for buyers and sellers of reinsurance.

Strong for how long?

Reinsurers’ collective outlook this year at Monte Carlo was bullish, with consensus expectations of a persistent hard market. These expectations are driven by heightened natural catastrophe losses, interest rate-driven asset impairment, lower initial capital re-entry compared to previous cycles, along with regional conflicts in Ukraine and Israel that are threatening to spiral into a broader, global conflict. All of this is combining to increase global risk premia to levels unseen in over a decade, or perhaps longer. This is in stark contrast to how the world looked just a few years ago.

In spite of this riskier landscape, the pricing pendulum rarely remains fixed for long if events do not materialise to sustain it. Rates should remain elevated at the 1 January 2024 renewal, but there are already early signs of movement. For example, dedicated reinsurance capital, which dipped by 17 percent in 2022, is now recovering due to the highly anticipated ‘pulling to par’ of bond portfolios along with new capital raising, now potentially approaching $20bn since Hurricane Ian. This capital is entering through its usual channels – the ILS and collateralised markets, secondary issuances by existing players and new start-up activity – but also, increasingly, through asset-light structures, particularly in areas where new capacity can be attracted through innovation.

Another mitigating factor to further upwards momentum may be a relatively quiet 2023 hurricane season – at least in terms of reinsured losses. While the 2017-2022 six-year average of total insured cat losses was $111bn, this year’s losses have only totalled about $80bn so far, and have been overwhelmingly retained by cedants. This may have been helped by the transition to El Niño in June 2023, which has historically eased hurricane frequency in the Atlantic as high westerly winds disrupt storm activity. While conditions could change with the occurrence of a major event before the end of the year, this looks increasingly unlikely.

From challenge to opportunity: creating economic value added

There is no doubt that the current environment is challenging. It is nevertheless typically during periods of elevated pricing, low retentions and relatively tight capitalisation that excess returns become possible, even probable, creating a sizeable opportunity for those who can navigate the evolving risk landscape. Assuming a ‘normal’ remainder of the year (admittedly, a large assumption), reinsurers stand to see their returns on invested capital outpace their weighted average cost of capital, marking the first time in years that positive economic value can be achieved.

Looking ahead

The industry is at a turning point. Key signals such as record high pricing and strong demand for capacity are indicative of a riskier global landscape. Questions remain, especially around exposure and volatility given heightened recent natural catastrophe activity. Reinsurers have the chance to increase value – including valuations – if they adapt to the changing market conditions. Much now depends on underwriting decisions and effective portfolio management as the reinsurance sector undergoes this pivotal shift. Embracing the modernising market, including the various new underwriting structures now coming into their own, will be key.

David Flandro is head of industry analysis and strategic advisory at Howden Tiger