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23 October 2022 Insurance

Reinsurers must secure ROE for investors

The reinsurance industry must find a way to return to healthy levels of profitability and again become a sector that is attractive for investors. Its return on capital in recent years has often been below the cost of capital—it must fix this urgently if it is to tackle the multiple challenges it faces and play an important role in helping society become more resilient.

That was one of the key themes that emerged from this year’s Guy Carpenter Baden-Baden Reinsurance Symposium, titled “Rising to the Exposure Challenge”. The speakers on the panel were: Ann Haugh, CEO, Axis Re; Thierry Derez, CEO, Covéa; Jean-Jacques Henchoz, chairman of the Executive Board, Hannover Re; and Massimo Reina, CEO, Europe, Guy Carpenter.

Henchoz pointed out that in four of the past five years, the reinsurance industry has posted a return on capital below the cost of capital. Its return on equity (ROE) was most recently measured at 4.4 percent, he said. “Would you invest in volatile industry that has an ROE of 4.4 percent?” he asked.

“The fact is that rate adequacy must improve, the industry must make itself more attractive to investors. We need that to happen so we can do our job as shock absorbers for the world; so we can help society become more resilient.”

This theme was echoed by the other panellists including Haugh. The Axis Re CEO said that the industry must find a way to deliver consistent profitability in order to prove its value proposition and attract capital. “We are facing unprecedented levels of complexity, but we must work together so that we can face the challenges and realise some of the opportunities these present.”

Haugh went on to summarise these challenges, highlighting rising exposure trends, partly driven by climate change, resulting in a greater severity and frequency of losses; inflation; geopolitical uncertainty; and interest rates.

“The theme of ‘Rising to the Exposure Challenge’ is a poignant one for the industry,” she said. “We are facing significant market complexity resulting in multiple challenges.”

But, she stressed, all these challenges can be turned into opportunities for the industry. She said reinsurers have the opportunity to allocate capital to lines of business where they can achieve the best returns. Risk selection becomes more important in such an environment; reinsurers will support the best clients she said.

Haugh added that the industry must also plan for the long term—in a number of ways. “Prudent reserving is more important than ever,” she said. “This is a long-term game and sustainability is key. We also need to stop recycling talent and invest in attracting new talent.”

She commented on Axis Re’s application of some of these lessons. Specifically, in June, the reinsurer pulled out of the property-catastrophe business to focus on casualty and specialty business. She said the move was not reflective of the market opportunity but was instead driven by the company’s own decision-making around where to deploy capital.

She indicated that, especially in the aftermath of Hurricane Ian, many reinsurers are unclear about their appetite in this renewal, especially those heavily dependent on retrocessional business and the insurance-linked securities (ILS) markets.

As such, she believes this year’s renewal will be even later than last year’s, when many renewals were very late. “I think you will see many lines being leveraged as people try to find optimal outcomes,” she said. “It won’t be a case of managing each line independently, we will see a more holistic approach. Brokers will be under significant pressure, especially as many cedants are seeking more coverage. Relationships will be tested; transparency and data quality will become key,” she said.

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