NEWS
Reinsurers must secure ROE for investors
Insurers have the opportunity to allocate capital to lines of business where they can achieve the best returns, say panellists at the Baden-Baden Guy Carpenter Symposium.
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.
“The industry must make itself more attractive to investors.”
Jean-Jacques Henchoz
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.
A new dynamic
Hannover Re’s Henchoz echoed many of Haugh’s points on the challenges facing the industry. He noted that the dynamic in the market has changed between September’s Monte Carlo Rendez-Vous and now—inflation has been replaced by the fallout from Hurricane Ian as the biggest talking point. A change in the dynamics around supply and demand has accelerated, he said.
“It has been a difficult year for the industry. It will also be a tough quarter,” he said. “Clearly, a supply-demand change is taking place. But demand for reinsurance remains very strong and continues to increase.
“Climate change is a challenge but also an opportunity that drives that demand. Technology offers so many opportunities for growth as well. Inflation will put additional pressure on the industry. There is disruption in the air but there are incumbents willing to deploy capacity,” he said.
Henchoz had a warning for the industry about its ability to deliver and make a real difference to society. He noted that the protection gap is still growing. Across the past decade, some 63 percent of economic losses are not insured.
“That is a concern,” he said. “As much as we are all proud to risk-manage our portfolios and ensure pricing is correct, that growing protection gap represents a reputational risk for the industry. We need to do more to tackle this problem.
“We need to talk about prevention and the role of government in some cases. We need to be adaptable and solve problems and that also applies to climate change.”
Guy Carpenter’s Reina, who opened the event with a presentation, concurred with the thoughts of Henchoz, noting that, after a number of years of the market being dominated by supply exceeding demand, that dynamic has reversed.
“Risk needs to be re-priced through the whole chain.”
Massimo Reina
“Risk assessments and risk appetite will need to be reassessed and relationships readjusted,” he said. “The insurance industry has seen many challenges in its long history, but rarely so many at the same time. It is now dealing with inflation, an economic slowdown, financial market volatility, losses and war,” he stated.
“None of these is new to the industry, but we are facing them all at the same time.”
Derez echoed the idea that some of the challenges the industry is facing are not unprecedented—but they are so rare that few remember to how to handle them.
“Inflation is important. But you have to remember that few people in our companies have ever seen it to this extent before. The last time inflation reached this level in US was 40 years ago.”
Industry must step up
Reina offered cause for optimism, however. “The industry is strong and resilient and capable of innovating and evolving,” he said. “Just look at how we handled COVID-19. The industry is very resilient. Capital remains strong, robust. Alternative capital still complements reinsurance very well.
“The appetite is still there for risk, but risk needs to be re-priced through the whole chain. The industry and broking world must step up to keep the world insurable.”
Reina noted that the cycle the industry has experienced this time has been different from previous cycles. Historically, hardening has started at the top of the risk chain and filtered down. This time, he stated, the primary market hardened first, followed by the retro markets. “Reinsurance was the last to adjust.”
He commented, in the context of Baden-Baden’s being a European-focused event, on the property-cat market in Europe specifically. He noted that the market remains in good health, offering a good return and invaluable diversification for reinsurers.
“Cat is a global business but Europe offers excellent diversification in terms of global cat risk, as well as within the region itself,” he said.
“It is not immune to losses: we have seen losses in Germany and France recently. But while about 11 percent of claims come from Europe, the market represents some 20 percent of global cat premium. The European market offers strong results across the cycle.
“That is good and makes me confident we can reach the right outcomes for reinsurers and cedants alike in this renewal.”
Main image: Shutterstock / L.O.N Dslr Camera
