Discipline is the new capacity gap: rates will hold or rise
Reinsurers can hold or increase the benefits taken from the 2023 market reset across pricing, T&C and structures as the capacity-driven market evolves smoothly into a discipline-driven market, one key equity market brokerage said of its takeaways from meetings with industry management at the Rondez-Vous in Monte Carlo.
“The margin expansion, better terms of trade and consequently much improved expected returns achieved amid the paradigm shift that the market has experienced in 2023 will persist for longer,” analysts at the Berenberg investment house told investor clients in a note.
Berenberg expects risk-adjusted rate changes will be “marginal, i.e. flat to up low-/mid-single digits, across property nat-cat,” varying by geography and loss history, but sufficient on the whole to help sustain returns above the industry cost of capital going forward.
Discipline can do for the 2024 renewals what outright capacity shortfall did in 2023, Berenberg suggested. “Enough is enough” appears to be the mantra of major reinsurers following a many-year history of earnings below their cost of capital.
“Neither the reinsurers nor their capital providers - the reinsurers and the insurance-linked securities (ILS) investors - would consider one good year, 2023, which is shaping up to be very profitable with expected ROEs of 17-20%, enough to recover from the five under-par years which they have just experienced,” Berenberg said.
But this time through, capacity is “adequate to absorb nominally higher demand” stemming chiefly from inflation, but not flooding in as has been the case following prior hard markets. The capacity shortfall that led to the elimination of lower layers and aggregate programmes in 2023 won’t be undone, but can’t drive the market to a repeat performance.
“The corollary is that this is not a capacity-driven hard market, but rather appears to be driven by subdued appetite.”
New capital is hard to find: capital raises “do not appear to be meaningful enough to put significant downward pressure on rates, and hence we believe will not materially move the needle” and the capital that does flow picks ILS vehicles allowing short-term bets with “cleaner” exits.
Comments follow a slate of meetings in Monte Carlo with leadership of Munich Re, Hannover Re, Swiss Re, SCOR, Conduit Re, Hiscox and Howden-Tiger where Berenberg found consensus amongst the reinsurers that a slate of uncertainties – nat cat frequency, inflation, social inflation and more – all supporting the case for further discipline.
“Thus, the reinsurers are currently being vocal about the need for further risk-adjusted rate increases,” Berenberg analysts wrote.
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