Rising capacity at renewals doesn’t derail hard market fundamentals

Talk that reinsurance capacity may have been teased in to tame the mid-year reinsurance treaty renewals doesn't undercut prevailing arguments for continued market hardening, a major equity market brokerage is telling market investors.

“We believe pricing momentum will continue, as capital levels remain well below 2021 and inflation/cat loss uncertainties are unchanged,” analysts at Morgan Stanley have argued in a note to investor clients.

“We continue to see a hard pricing environment into Jan 2024 renewals but are watchful for moderation as the year progresses,” analysts wrote.

Total reinsurance capital at neighbourhood $605 billion still shows a “sizeable gap” to the $675 billion sported ahead of 2022 bond market mayhem.

The demand side, in turn, is unrelenting. “In addition to the gap on capital levels, the uncertainty coming from claims inflation and climate change related risks has not abated,” analysts said.

Morgan Stanley analysts admit to a $30 billion “rebound” in capital in 2023 (5% YTD in traditional and 7.5% in ILS) and have since seen “some softening in areas” at the latest treaty renewal.

But for the most part, rate gain in excess of 30% on loss impacted property cat accounts at the mid-year suggests reinsurers “remained largely disciplined.”

Capital increases in traditional reinsurance have not yet amounted to much more than a drop in the bucket, with Everest Re on top of a very short list with $1.5 billion.

But hard markets tend to change that reticence.

“We would not be surprised if more players looked to grow during this hard market cycle,” analysts wrote.

Capital increases among traditional reinsurers would be safer for the market than an accelerated flow into ILS, Morgan Stanley noted. “Traditional players require a higher rate of return,” they note. They also have a natural capital accretion, not entirely true of ILS vehicles.

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