Reinsurance “less dislocated” but pent-up demand possible at Jan 2024: Peel Hunt

Overall, the global reinsurance market is now less dislocated than it was at the beginning of the year, analysts at Peel Hunt believe, but with a supply-demand imbalance still in evidence, they say that pent-up insurer demand for cover could emerge at the January 2024 renewal season.

Rising demand for reinsurance in a marketplace where capital levels remain relatively subdued, with many suggesting the supply-demand gap persists, would provide strong impetus to sustain rates and prices at the now harder and higher levels we’ve seen so far this year.

Helping the reinsurance market to become more balanced, even as capacity issues have persisted, are a number of factors.

First and the primary reason, is that reinsurers are in general willing to put more capital to work to satisfy demand, at the now higher prices.

This has been especially evident for the areas of reinsurance that had been most dislocated, such as property catastrophe risks.

Peel Hunt’s analysts note that with more premium being written, the US property reinsurance market has been growing, although they also note that “inflation remains a force to be reckoned with.”

They note that Bermuda based specialty reinsurer share prices have outperformed London this year, but put this down to being overweight reinsurance.

“We remain long-term positive on the specialty reinsurance sector in general,” the analysts state.

Another factor helping the reinsurance market become less dislocated at the mid-year renewals was the inflows of capital to catastrophe bond fund strategies, with cat bonds taking a larger share of upper-layers of reinsurance towers and this reducing some of the capital gap pressure, it now seems.

While the supply-demand gap is generally agreed by the industry, Peel Hunt’s analyst team note that it could actually become more pronounced, without new capital growing to help fill it.

They explain that, “Insurers have further pent-up demand for reinsurance protection, not having had the funds to complete their programs at the 1H23 renewals.”

They continued to say, “Reinsurers suspect this demand will emerge with a lag at the 1/1 2024 renewals, assuming insurers are able to reprice their primary exposures in the US admitted market in particular.”

There is room for more rate hardening as well, the analysts note, as while, ” Property catastrophe reinsurance rates have reached rate adequacy in the US, but there still is a need for further rate hardening in Europe,” they explain, citing Conduit Re.

While, ” In the US, rates have surpassed the levels of adequacy post Hurricane Andrew in the early 90s.”

Adding that, “Traditional reinsurers are willing to commit more capital to the property catastrophe reinsurance market as rate adequacy has been reached in the US (Europe is still somewhat behind) and risk-adjusted returns are proving attractive.”

It’s also notable that while there could be more demand, the supply even if capital does not pour in could still be higher, as reinsurers have risk appetite to play with.

Many reinsurance firms had reduced their risk appetites over recent years, especially for catastrophe exposed treaty business.

But, at the now higher rates and with rate adequacy seen as reached, or as near as, in the United States, reinsurers can now expand into property cat business with greater certainty they are more adequately covering their loss costs, expenses and costs-of-capital.

“Risk appetites are increasing (rising PMLs) from a low base and the capacity to grow property catastrophe reinsurance is still material within many reinsurers’ capital headroom,” Peel Hunt’s analyst team stated.

Saying, “The market environment is providing opportunity for accelerated growth albeit this is not coming at the expense of (re)insurers diversification strategy as the sector continues to manage earnings volatility.”

Summing up to explain, “The outlook for rates remains positive, with reinsurers stating that pent-up insurer demand combined with the need to improve rate adequacy in Europe are key drivers alongside: (a) ongoing elevated inflation; (b) rising climate change risk awareness; (c) no material new reinsurance capital entering the market; and (d) attractive growth in the US E&S market.”

With many reinsurers saying they expect the hard market to persist at the January 2024 renewals, underwriters are likely to be incentivised to build out portfolios, as companies look to capitalise on some of the best market conditions in years, before any meaningful return to softening is seen.