Hopes for any softening of rates are premature: Lohmann

Hopes for a softening of rates in line with the cyclical nature of the industry are premature, as inflation will continue to drive increased demand for coverage, Dirk Lohmann, chairman,  Schroders Capital ILS, told delegates attending Intelligent Insurer’s  Re/insurance Outlook Europe 2023, conference taking place in Zurich this week (June 19-20).

He was speaking in a session called ‘Unlock capital via third parties to find solutions for new and existing risks’ alongside Alexandre Puydebois, chief risk officer, Toa Re Europe and Hetul Patel, chief actuary, Liberty Mutual Reinsurance.

“As a seller of cat capacity, inflation is very pertinent as demand is going up and will continue to do so,” he said. He noted that very little new capacity entered the market in the second half of last year, which may have muted price increases, but new money has started to enter in the first half of this year, both in the form of new equity capital being raised by established players and in the ILS space.

“But, due to inflation, demand will continue to outstrip what is coming in. This means hopes for a cyclical downturn are premature,” Lohmann said.

Patel added that he had seen estimates that the US market was $15-$20 billion short on cat capacity at the last renewal. He noted that reinsurers have deployed capital in different ways but also stressed that the question of whether we are in a true hard market now – and if rates are adequate – will only be answered over time. “Rates look healthy but only time will tell if we are pricing things correctly,” he said.

Puydebois said that more risk can be good news for the reinsurance industry – but added that the risk landscape is getting more complex. He noted that it is easier for capital to enter the industry now, using a variety of mechanisms including sidecars, for example. But he also stressed that it would be in the industry’s interests for the flow to be measured.

“We need extra capital to flow in but in a smart way and a gradual way,” he said. “The amount of what you might call alternative capital is bigger than ever, but if it comes in too fast or targets the wrong risks, the market will quickly become soft again. Investors need to look carefully at which products they target. They do not want a repeat of some of the surprises they have had in the past.”

He said this in the context of highlighting the stark difference in the returns investors received between 2012 and 2016 compared with 2017 onwards, where cat losses severely dampened returns.

Lohmann added that a return to better, double-digit returns would be crucial for attracting new capital to the industry. “We now need to think about attracting capital back into the industry,” he said.

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