Managing the cycle? Reinsurers under pressure as pricing debate grows: MS Re CEO

Pressure is building for 1/1 renewals. Alternative capital is increasingly buoyant, and secondary perils continue to dominate losses. At July 1 renewals, cat rates were edging down, begging the question whether the reinsurance industry is managing the cycle or being driven by it.

Key points:
Plenty of capacity, but discipline at risk
Negotiations are ‘respectful’
Rates will fall at 1/1 renewals

That is the view of Robert Wiest, chief executive officer of MS Re. Speaking to Monte Carlo Today, he noted that reinsurers could slide back into familiar patterns, following supply and demand — which can have worrying implications for sustainable partnerships with cedants. Click here to watch the full interview.

“The industry collectively calls for disciplined underwriting – to investors, to journalists, to each other, and to brokers and cedants – but the temptation to go for growth is too strong,” he said. “You see it at each renewal.

“But when we look back into past cycles, you can argue whether we truly manage the cycle or whether we – like many other industries -- simply are driven by the old economic scheme of supply and demand and being driven by it.”

Despite years of hard-market rhetoric, reinsurers have rarely resisted the gravitational pull of their need to put capital to use. “The end of the soft market in 2023 was not caused by reinsurer actions but by hurricanes and rising interest rates,” Wiest pointed out. His concern: the market is starting to show signs of a repeat.

“My hope is that we have learned from the past, but when I look into how the current very positive market for reinsurers is developing, I fear we are in for a repetition,” Wiest said.

‘Tariff-related inflation and North Atlantic hurricanes are among the known unknowns.’

Capital is back, cedants have a choice

That caution is timely. Between March and June, alternative capital poured back into the market, particularly through ILS and cat bonds – vehicles that are popular for their low cost, commoditised approach to risk, but can also exit quickly. The influx has widened choice for cedants.

“There’s a high probability that 1/1 renewals will be similar to 1/1 this year, though tariff-related inflation and North Atlantic hurricanes are among the known unknowns,” Wiest said.

“For cedants, this spells negotiating power amongst well known threats. Cedants will find a home for their risk. They have a choice in their risk partner– between capital that can exit quickly or a reinsurer that is committed to the business.”

Secondary perils in spotlight

Overlaying this capital dynamic is the rise of secondary perils. From Los Angeles wildfires to flooding in Texas, Switzerland and the Philippines, and severe convective storms in the US, these “non-peak” events increasingly define the loss landscape.

‘We are getting to a more balanced position between reinsurers and insurers in terms of who is shouldering the risk’

“At the moment, cedants are still more exposed to secondary perils, and we as reinsurers would like to have less on our balance sheets. But you can clearly see the trend coming back. The journey has started,” he said.

Attachment points had drifted lower again, shifting risk back to reinsurers, but Wiest sees corrections returning. “We are getting to a more balanced position between reinsurers and insurers in terms of who is shouldering the risk.”

Wiest traced the shift back to the 2022/23 renewals. “We always talk about price and there were significant increases, but what was much more fundamental was the shift of exposure out of reinsurance balance sheets and back to cedants.”

The balance, however, remains precarious. “The big question is whether we are able to maintain a balanced point, or whether reinsurers end up once again with the shorter end of the stick,” he cautioned. “That’s territory we cannot go back to, because we overstretched the last soft cycle from an investor’s point of view. We must be careful.”

“But the optimum balance on secondary perils remains elusive,” he said.

Renewals driven by economics

If the balance is delicate, so too are renewal discussions. Wiest is pragmatic: “We should take out the word ‘fair’ from negotiations.

“Negotiations are not happening in a spirit of fair discussion about shared risk-taking,” he said. “They are respectful – that’s a better word – but ultimately they are based on economic pressures and risk appetite.”

That means Cedants will push harder when conditions allow, while reinsurers must recognise when clients face sharper challenges and when to push back. Either way, the driver is unchanged: supply, demand and the cost of capital.

Wiest believes it will take more than one shock to alter the broader trajectory.

“There’s plenty of capital – more than enough, as long as there are no surprises on the cat side. To really tilt the balance, you’d need not just one large event but two, combined with economic pressure. That’s what truly impacts our industry, because it hits both sides of the balance sheet.

“Rising interest rates alone won’t do it; it takes a big shock – a massive hurricane, or an earthquake – combined with sudden economic change,” he said.

At 1/1, unless there is an external massive event, we can expect a straightforward negotiation.

MS Re’s own transformation

While the cycle debate rumbles on, MS Re has been quietly reshaping itself. A two-and-a-half-year transformation programme has modernised systems and strengthened processes. For Wiest, though, the real progress is in client experience.

“We clearly moved from a company that was known but not perceived as very relevant, to one that is now much more relevant to our clients,” he said. In some cases, MS Re is now on lead panels. “For me, the real measure is: are we creating value for clients? Are we relevant to them in their own portfolio? That is what matters.”