The main challenge for the global reinsurance industry is to take maximum advantage of the current hard market environment, with reinsurance rates-on-line, particularly in property-catastrophe, as high as they’ve been during most careers, possibly since the advent of cat modelling, David Flandro, head of industry analysis and strategic advisory at Howden Tiger, told SIRC Today.

“The period from 2012 to 2018 was basically a period of falling and eventually very low pricing, and low profitability for the reinsurance sector,” he said. “That persisted and it didn’t get better in 2017 with Hurricane Irma. 2022 was an especially tough year, not only due to Hurricane Ian, but due to the big capital impairments we had on the asset side. So, it’s been a challenging environment for reinsurance for quite some time.”

Flandro stated that the market has now shifted to an environment where reinsurers can exceed their cost of capital. This is probably the first time it has happened in at least a decade. Reinsurers have to create economic value while they can, he believes.

“As somebody very wise once told me, you’ll probably spend one out of seven years in your career in a hard market; in my career, this has worked out to be closer to one in 10,” he said. “So the real challenge is to make hay while the sun shines.”

According to Flandro, this means underwriting opportunistically, taking advantage of current retentions, attachment points, pricing and the associated forward profitability and economic value. If undertaken successfully, this should affect your valuation positively, he said.

The flipside is that if everyone does it, rates won’t stay high for long, so it’s a paradox, he pointed out. If the entire sector jumps in with both feet, the hard market will end. Yet the sector needs the hard market to persist in order to convince investors that the industry can create economic value over the long term.

“It’s a real balancing act to get it right. This is a challenging moment,” Flandro stressed.

In addition, the Asia-Pacific region faces some unique challenges. The protection gap is a bigger challenge than in other developed markets. The ability to secure reinsurance cover is just as acute in the region as it is anywhere else, possibly more so in certain regions. This challenge has been exacerbated by a series of recent loss events, including floods and wildfires.

The entry of capital

Flandro stated that it’s interesting to observe how capital is coming into the sector. This is happening in a very different way from previous hard markets. There have been only a few times in the past three decades when capacity has been this limited and pricing as high as it is now.

Typically, after a period like this, capital re-enters the market quickly. For example, something like $23 to $24 billion come in after Hurricane Katrina. The initial post-Hurricane Ian numbers are not yet complete because the market is still going through the capital-raising process, but according to figures available from Howden, the current total is probably half of what came in after Katrina. Capital re-entry is slower than after prior events.

Howden attributes this partly to the 2022 financial crisis in the bond market, and partly through investors being far more cautious coming into the sector. Flandro noted that between 2017 and 2022 reinsurers struggled to earn their cost of capital, making investors cautious.