Attitudes on pricing are generally seen as “bullish” as the January reinsurance renewals approach, with capacity availability and risk appetite seen as key factors, according to Head of Analytics at Howden unit HX, David Flandro.
Another factor set to drive rates and market conditions is trapped collateral in the insurance-linked securities (ILS) market, with a number of ILS players facing yet another year where some of their capital may not be available to roll-over into renewal deals.
Flandro noted that the third-quarter was particularly eventful, with the highest quarterly catastrophe loss since 2017 putting this year on-track to another significant cat burden for insurers and reinsurers.
That, alongside macro factors and inflationary trends, has elevated risk perception and is driving some reallocation of capacity, Flandro noted.
It’s also affecting renewal price expectations, which Flandro described as “bullish”.
He explained that there is, “Continued confidence in price increases, particularly in the reinsurance market.” Which aligns with the results of our recent survey.
Adding that while, “This varies by region and by class of business, the general attitude right now is bullish.”
Part of this is down to availability of capital and also changing risk appetites, as certain areas of the market experience a tightening of supply.
“There’s been a rebalancing of capacity, particularly to address asset light business opportunities. But also generally, where capacity is needed and where exposures allow.
“There’s a real demand and supply imbalance right now. Capacity inelasticity is influencing pricing in most lines,” Flandro said.
On top of this, the ILS market has been particularly affected by the European flooding and hurricane Ida in the third-quarter of 2021, resulting in more challenges related to trapped collateral at the end of the year.
“There is now some trapped collateral again within the ILS market, which is constraining supply at the margin,” Flandro said.
HX Analytics believes that that retrocessional capacity constraints are going to be another key pricing influence this year at the renewals.
But at the same time, the company believes that there are multiple buyers out there seeking more protection going into 2022.
So elevated demand, but constrained supply. Which perhaps goes some way to explain the lateness of the renewals, as firms hold out for the best opportunities to deploy their capacity.
One theme in Flandro’s update after the third-quarter is that costs-of-capital have risen, due to loss activity, macro trends and inflationary factors.
This has clear ramifications for the reinsurance market and its returns, also helping to drive the bullish rate ambitions.
“There is investor pressure currently to optimise the business mix, to use captives and asset light vehicles more to enter new lines of business, including reinsurance,” Flandro said.
Adding that, “This is being driven by heightened costs-of-capital seeking heightened returns.”
At the same time there is a, “Continued near-term pricing upside, with a volatility price tag to address macro uncertainties.
“There’s a lot of confidence in near-term pricing at the moment and much of that is being drive by heightened risk premia, read higher costs-of-capital,” Flandro commented.