Capital and capacity in the driving seat for reinsurance in 2024: Goldman Sachs

Analysts at Goldman Sachs have noted that 2024 is going to be a year where they will be focusing on the potential for inflows of alternative capital or new entrant formation to change the dynamic across reinsurance and specialty insurance markets.

Commenting on the large European property and casualty insurance players, including those operating at Lloyd’s, the Goldman Sachs analyst team note that the main reason the January reinsurance renewals were the recoveries in traditional and insurance-linked securities (ILS) capital.

Once again, it has transpired that it is capital and capacity that are the main lever that seems able to drive the re/insurance industry dynamic in a more balanced direction, following a period of dislocation.

Over the last couple of decades, the promise of efficiency gains has been touted as a factor that would level out the cycle and therefore make for a more balanced marketplace, but it is capital and capacity that continues to drive conditions, while gains from market structure and efficiency overall seem to be ineffective at driving a more efficient marketplace.

But, the main efficiency gain being seen, is in how capital is deployed into the market. Although, even the use of capital markets technology and securitization structures are incapable of levelling out the cycle of prices, both following losses or in relation to supply and demand, it seems.

As capital flows supported a more orderly renewal for January 2024, the Goldman Sachs analyst team said that, “We believe flows of alternative capital/new entrant formation are a key focus in 2024.”

They believe that evidence from ILS market performance benchmarks such as ILS fund indices (see the Eurekahedge ILS Advisers fund index and the Plenum UCITS cat bond fund index) show that capital providers are getting well-paid for the risk they are now taking on.

“In our view, the solid ILS index performance reflects the confidence on margin from the risks in which these assets participate,” the analysts explained.

Goldman Sachs analyst team also cite Artemis’ data on the catastrophe bond market, saying that the market is already roughly 17% of the way towards the annual issuance record achieved a year ago, just with the $2.8 billion that has settled already.

Of course, with cat bond deals expected to settle and take first-quarter cat bond issuance to more than $4 billion and a further almost $1.6 billion already in the market and potentially ready to upsize for April, the catastrophe bond market is already tracking at record-pace in 2024.

If 2024 is another year with attractive reinsurance returns, then capital needs to remain the key focus for influences over the market, the analysts conclude.

One factor in the favour of the balance of the market is the fact capital remains less attracted to lower-layers of reinsurance towers and aggregate limits, meaning the primary market continues to retain more of its losses.

That feature of how the market has developed through 2022 and 2023 has helped to maintain the balance into 2024 and also sustain the improved economics, at many but not all layers of the risk tower.

That said, the economics even at the higher-layers of reinsurance towers, where catastrophe bonds feature, are still considerably better than they had become at the bottom of the soft market, around 2016 and 2017.

Higher attachments and a retrenching higher into the risk tower has helped capital earn a better return and its deployment to these layers has also proven efficient, which has been effective in moderating returns somewhat, but while still sustaining a much better economic outcome and keeping capital deployment and therefore growth attractive.

As a result, the focus on capital flows continues and we’re seeing this in ILS and cat bonds, with growing interest in the ILS segment (when traditional media starts to focus on the catastrophe bond market…), increasing inbound from new and interesting investor groups, as well as rising readership.

Plus, reinsurance in general has had a stellar 2023, which is driving rising private equity interest as well, although an increasing amount of that interest and capital will come in ILS formats in future, for their efficiency, we believe.