Almost $20bn of reinsurance capital raised, more to come in 2021: Flandro

Close to US $20 billion of new capital was raised by the global reinsurance market and new start-up entrants in 2020 and there is more to come in 2021, as the need for capital persists, according to David Flandro of HX Analytics.

Thanks to its ability to raise fresh capital, the reinsurance market was not “universally dislocated” at the key January 2021 renewals, Flandro explained in broking group Howden’s market report this week.

Howden’s estimate of global reinsurance capital levels reached a new high at the end of 2020, the broking group explained and this is expected to remain broadly stable through 2021 and into 2022 as well.

Flandro, Managing Director, HX Analytics, commented on the renewals, “A multitude of factors informed this year’s (re)insurance renewals. Despite the asset shock that occurred immediately post-lockdown and full-year underwriting losses of USD 100 billion or more, capitalisation has proved resilient.

“Incumbents and new players raised close to USD 20 billion of capital in 2020 for all purposes, with more to come this year. This is therefore not a universally dislocated market; differentiated risk management strategies and advice can still unlock access to capacity, even if the landscape has undeniably become more challenging.”

The strength of reinsurance balance-sheets has remained a strong draw for investors looking to deploy capital into equity allocations to incumbents.

While, in the same vein, this perception of strength among reinsurers, as well as of the opportunity to profit from higher reinsurance pricing driven by market dislocation and losses due to Covid-19, has driven private equity investors to back a raft of start-ups as well.

But underpinning all of this, is a broad consensus among the major investors of the world, that insurance and reinsurance capital is going to face increasing demand, we believe.

There has been a shift in global risk perception, awareness and an increase in risk aversion, all driven by the global pandemic over the last year.

This shows no signs of letting up and, as we’ve been saying since as long ago as March 2020, the upshot is likely to be an increased desire to manage and transfer risk.

Which means risk capital will be required and opportunity will therefore abound in the insurance and reinsurance markets.

All of which also underpins resurgent and broadening interest in the sector among a range of investor communities, which is now set to play into more capital inflows both in the traditional and alternative or ILS market segments, we believe.

Howden’s new report says to expect “strong premium growth” into 2021, which is likely due to some of these dynamics in the market and in the overall perceptions of risk and the importance of insurance in mitigating it.

Howden sees the capital levels being attracted to reinsurance right now as comparable to those seen in 2001 and 2005, again reiterating that the company expects to see more new capital coming into reinsurance this year.

All of this new capital will, of course, call into question the market cycle and whether price increases won will now stick.

José Manuel González, CEO, Howden Broking Group, explained that, “Whilst the pricing environment may be supportive for carriers in 2021, this should not translate into a degree of risk aversion where underwriters accept rate but shy away from new risks or new business.

“The global risk landscape is changing like never before. Carriers and brokers have always served clients best by learning from shock events and 2020 is surely a year rich in its lessons. There is much to draw from: COVID-19 has brought the growing ‘intangibility’ of risk into focus, a trend that is only going to accelerate as new technologies continue to redefine risk characteristics.

“Irrespective of what happens to the market cycle in 2021, the (re)insurance market must seize the opportunity and focus on doing what it has done so well several times over; innovate and develop creative solutions for the changing needs of our clients.”

Howden notes that the question of whether market discipline will endure through 2021 and support pricing at future renewals is likely to be “among the most contested topics of 2021.”

As we’ve explained before, the key to sustainable profits for reinsurers and also ILS funds is in securing rates that enable loss costs, costs of capital and expenses to all be covered over the longer-term, while allowing for a profit margin.

To achieve this though, the reinsurance market needs to set new baselines for rates, not new pricing peaks that are swiftly eroded as more capital flows in.

Will 2021 be any different here?

Read all of our reinsurance renewals coverage here.