The very nature and drivers of the current hard market are very different from previous ones, meaning current market conditions may last longer and trigger more fundamental changes in the industry, including a greater demand for alternative structures and solutions, delegates in Baden-Baden have heard.
They were some of the salient points debated by a panel of senior executives at the Guy Carpenter Baden-Baden Reinsurance Symposium on October 22, attended by some 600 senior executives.
The session, titled “The rise in demand for alternative solutions”, featured Burkhard Keese, chief financial officer, Lloyd’s of London; Thierry Léger, chief executive officer, SCOR; Laurent Rousseau, chief executive officer of EMEA and Global Capital Solutions, Guy Carpenter; and Eveline Takken-Somers, senior investment manager, PGGM. Delegates were welcomed to the event by Baden-Baden’s Lord Mayor, Dietmar Späth.
Rousseau opened proceedings with a presentation outlining his take on the current market conditions. He noted that a few years ago, some were questioning whether the industry was still cyclical. He said the current environment proves that it is—but this hard market is very different from those the industry has seen before. One big difference is that the insurance cycle changed first this time.
“The insurance cycle started in 2017; the reinsurance cycle properly started in 2023, piggybacking on insurers,” Rousseau said.
“It is important to understand the drivers this time: this cycle has its own shape and characteristics. Its drivers are multifaceted, from the war in Ukraine to inflation as well as more common risk factors such as increased cat risks and concerns around cyber. As such, the price reaction does seem stickier than before.”
He added that, unlike in previous hard markets, there has been no major market rupture or single big loss of capital. Instead, capacity is available—but is willing to respond only at the right price.
“Reinsurers want to make the most of this hard market, but at the right price and with discipline,” he said. He noted that overall reinsurance capital has rebounded this year: he expects 2023 capital to be closer to 2021’s levels. Despite this, he believes, reinsurers will hold their ground. “I expect rates to remain disciplined reflecting heightened loss costs,” he said.
“We need to sell the value of the product.”
Laurent Rousseau, Guy Carpenter
Rousseau highlighted bigger questions for the industry. He said he believes insurers and reinsurers need to focus on what each are good at: reinsurers will increasingly deal with severity and volatility while insurers will deal more with frequency. He noted that big increases in attachment points at the last renewal reflected this.
“Reinsurers must focus on the value they offer clients, as opposed to focusing only on price,” he said. “We need to sell the value of the product. The price must reflect the risk, but the industry must go further—if we talk about rates and exclusions alone, there is a limit to what that can achieve,” he said.
He went on to explain the value of alternative solutions, which can be used to smooth volatility in profits and offer balance sheet solutions. He said the capital markets must be part of the solution; it will only grow and, he noted, 2023 is set to be a record year for cat bond issuance, for example. “Cat bonds are performing very well and there is a lot more room to grow,” he said.
He concluded by stressing that the industry should not fixate too much on the type of capital. “All capital has the same focus, which must be on the relevance of our industry and providing solutions commensurate with the situations we face. We have focused too much on price and terms and conditions such as exclusions, rather than value and solutions,” he said.
A new environment
Léger from SCOR picked up on these themes, agreeing that a gap has opened between demand for reinsurance and offer/supply—and demand continues to outstrip supply by some way. Despite this, little new capital has entered the industry. “There has been no wave of new Bermuda companies. We are in a different market environment—the cycle feels very different,” he said.
In this context, he said, demand for alternative solutions is increasing—and he wants SCOR to become a key player in this area. “Where demand and offer are not aligned, market participants will seek alternatives,” he said.
“SCOR will invest in this space and respond to clients’ needs. We already have a team offering structured solutions but will invest further; we want to double our premium income in this space.”
“By investing in ILS we help strengthen companies’ resilience.”
Eveline Takken-Somers, PGGM
He added that the industry already has the solutions. “It is a highly uncertain and volatile environment, but I do not think a lot of innovation will be needed—most solutions are here now, it is just a question of using them. But that is a big part of our plans.”
Keese from Lloyd’s also made a case for market conditions enduring. He said that rates in property, for example, are now adequate. But that is after at least five years of losses. “That means they must stay higher for quite a while as we need to earn back the money the industry lost,” he said.
He made the case for increased use of alternative structures, highlighting the potential of London Bridge 2, Lloyd’s insurance-linked securities (ILS) vehicle. He said that previous structures had been too focused on customers, as opposed to investors. London Bridge 2 looks to rectify this. He said it has up to $1 billion of deals in the pipeline but stressed that the industry as a whole must learn to become more investor-friendly if it is to secure the capital it needs in the long term.
“The challenge in the coming years will be obtain the right level of capital to finance our businesses,” Keese said, noting the different industries competing for the same investor pool.
“Investors like the non-correlated nature of insurance,” he said. “And the returns can be higher in alternative asset classes. Equally, the underwriting side needs a diverse pool of capital that can also be flexible.”
Takken-Somers offered a different perspective: as an investor. She described the journey PGGM has been on since it first invested in cat bonds in 2006. In 2018 it established Vermeer Re a rated vehicle, and in 2022 issued its first transaction through the special purpose insurer named Nightingale Re. She said the business now wants to build out this vehicle and establish long-term relationships with blue chip insurers.
“We invest in ILS because it provides diversification, this is the biggest reason,” she said. “It also offers an attractive risk:return profile over time. Finally, we value the sustainable element—by investing in ILS we help strengthen companies’ resilience to climate-related hazards and natural risks. These principles are very important to us.”