Strong demand a ballast for reinsurance underwriting profitability: Berenberg

Strong and still rising demand for reinsurance protection is expected to be a ballast for underwriting profitability for the sector, even as pricing comes off its recent peaks and the market begins to soften somewhat, analysts at investment bank Berenberg have said.

In commentary that reads across positively for the catastrophe bond and insurance-linked securities (ILS) space, the analysts from Berenberg note that reinsurance capital providers are still very return focused at this time.

While the analysts believe that reinsurance pricing has “likely peaked” they also note that conditions ahead are set to be more nuanced.

“Reinsurers and alternative capital providers appear to have become increasingly confident in deploying incrementally more capital to grow in the hard market following a record 2023 year, which appears to have been a strong proof point,” the Berenberg equity analyst team explained.

Adding, “This dynamic is currently manifesting in risk-adjusted rates fluctuating from modestly down to modestly up yoy across the January and April renewals, with brokers reporting more signs of pressure mostly on the top layers (retrocession) of reinsurance programmes.”

If the market remains free of major loss activity then the analysts believe reinsurance prices will see additional marginal pressure at the upcoming rounds of renewals.

But, conversely, if any major losses did occur, then the analysts believe the opposite could occur.

“However, we do not anticipate any significant deterioration in underwriting profitability, as strong demand for more cover should be a ballast,” they explained.

Demand for reinsurance protection is expected to continue growing at a rate faster than GDP, not least as the growth trend in natural catastrophe losses is expected to outpace it.

“Demand for (re)insurance protection will continue to grow ahead of GDP, assuming the capital is there to support it,” the analysts said.

Right now, with capital providers appearing increasingly confident, there seems no challenge to supporting the increased demand but this could be capable of soaking up any excess and so can help to sustain profits through 2024.

The analysts note that the ratio of reinsurance capital to premiums remains lower than it had historically, meaning “This ratio is indicative of tight market conditions as there is more premium per dollar of capital in the sector thanks to strong pricing and a lower influx of capital than historically.”