Global re/insurer capital raising since pandemic approaches $26bn: Willis Re

Global insurance and reinsurance capital raising by traditional companies is now approaching $26 billion, according to the latest analysis from broker Willis Re.

The reinsurance broking arm of Willis Towers Watson (WTW) explained today that insurers and reinsurers raised some $20 billion of new capital in 2020 alone.

This came during the COVID-19 pandemic, demonstrating the attraction global private equity investors have to the insurance and reinsurance underwriting industry, as well as their continued desire to find sectors to invest in that are a little less correlated with global financial markets and indices.

Of course, the improving pricing across insurance and reinsurance has also helped to drive this interest and in addition, we’d add, the fact the insurance-linked securities (ILS) market was not as readily able to raise new capital in time for the January renewals, was also a factor in the flood of capital into existing and new startup insurance or reinsurance firms.

A further metric that helped to attract investors to re/insurance in recent months is the fact the sector bounced back strongly after an initial pandemic related hit to its capitalisation, and another factor is that new underwriting entities have no legacy or exposure to COVID-19 related claims.

Capital raising is continuing into 2021, adding to the $20 billion, with some $4 billion already raised and another $2 billion in progress or contemplated, Willis Re explained.

Which takes the total new capital flow into the market to around $26 billion, in executed and planned, which is actually roughly the same as the amount of pandemic losses Willis Re reports to have counted so far.

“The key motivator for this capital raising has been attractive pricing, particularly for reinsurance and commercial insurance lines of business, although in some cases exposure to COVID-19 related claims has been a factor,” Willis Re said.

Market conditions are not the same as previous influxes of capital into the sector, the broker noted, and “we haven’t had a hard market as overall capital levels have remained robust,” Willis Re explained.

In addition, low interest rates means that technical profitability will be key for re/insurers going forwards, a very different situation to 1992, 2001 or 2005 startup reinsurer waves.

“As a result, there is notable fluidity of capital entering and leaving the market depending on the degree of perceived opportunity. For example, Fidelis and Renaissance Re returned capital to investors after pricing weakened for retrocession business. It is also worth noting that reinsurance dedicated capital raised in 2020 was significantly less than that returned by reinsurers through buybacks and special dividends,” Willis Re continued.

The other area of difference, we’d venture, is the realisation among insurance and reinsurance firms that they need higher pricing to sustain profitability.

In previous years, for example 2011 when the ILS market began its spurt of growth, the traditional re/insurers were seemingly less profit focused and chased rates down, in fact led the way in Europe and Asia as they sought to compete for market share.

That isn’t happening right now, although the mid-year reinsurance renewals could see elevated competition compared to January, we believe, particularly as cedents are finding such value in areas like the catastrophe bond market right now.

As a result, while all this capital continues to flow in, we believe that ultimately the cost of reinsurance capital and the efficiency of the operations deploying it, will once again become key drivers for success in this market.

Hence new startups and incumbents need to not just focus on gathering capital, but on how they manage and deploy it, to ensure they are able to make the returns these investors want, while still remaining competitive in the marketplace.