Reinsurers have capital, but also every reason to be cautious
Last year’s outright lack of capital is this year’s capital hesitancy in the face of exponentially rising risk complexity across a long list of business lines, PwC’s top man for insurance advisory Jim Bichard told Intelligent Insurer. “The message this year is really about the complexity of the risk market,” Bichard said.
One year ago, the story had been clear under overarching headlines: five years of poor returns, often driven by nat cat losses, merited a major repricing and a massive hike in attachment points to put reinsurers well above frequency losses.
In the event, ever-higher nat cat jitters simply meant the capacity wasn’t there to chase a demand side stoked by rising exposures and the impact of inflation. Lower attachment points, aggregate programmes and soft rates never stood a chance.
Reinsurers may have lost the unity of message going into the next 1/1, but not the barriers to capital deployment, Bichard says. “Maybe it’s only saying that things are complicated, but the capital on hand has to be allocated very carefully.”
His message fits those coming out of the major reinsurers. Climate impact on natural catastrophe, litigation in US casualty, rising geopolitical tensions and risks in SRCC, and the lingering unknowns of cyber risks are the main talking points.
That list can sound a bit unimaginative, “but that does not mean they are not very big issues” Bichard said.
“The fact that some elements of the list are static does not mean they are not important—it means they remain unsolved, possibly unaddressed.”
The reinsurer earnings side of the arguments is not fully solved, either. The rating momentum and the move upward in towers that put losses in the rear-view mirror can’t offer a quick fix to the capacity question.
“2023 and 2024 will be good years—but that is not long enough to not worry about making a return ahead of the cost of capital,” he said.
It’s not enough to attract new capital and the capacity shortfall will roll on, although “not as profoundly as last year” Bichard said.
“The industry has to be focused on setting a track record for beating cost of capital.”
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