Industry must regain credibility: Baden-Baden panel

The reinsurance industry has no chance of convincing investors to stump up more money for ILS if the reinsurance market can’t even earn its own cost of capital, industry leaders agreed at a seminar at the Baden-Baden reinsurance meeting on Sunday (October 23).

“You have to have an attractive return on capital,” Axis Re CEO Ann Haugh told industry leaders at a symposium hosted by Guy Carpenter. “And we just don’t have that.”

Investors are not in short supply; only product credibility seems to be short on the market.

“The capital is here, and a lot of people are watching us,” the CEO of Hannover Re, Jean-Jacques Henchoz told guests. Investors can come to the table via a multitude of channels, but their interests will look similar, Henchoz said.

“Many players are observing us and the view they give us back is loud and clear: they want to understand what they are covering, they want the track record, the underwriting acumen of the company. And they want a double-digit rate of return. If not, they are just going to observe.”

The upshot: no new capital will enter the market for the January 1, 2023, renewal and the gauntlet has been thrown down for the industry to prove itself if ILS capital is to flow in again in 2024.

“If the industry delivers in 2023, then we are going to see some fresh capital in 2024,” Henchoz said. “But I doubt very much you are going to see significant amounts of capital coming in now for renewals.”

Haugh said she has been encouraged by a palpable shift in interest towards new longer-tailed lines that might draw new elements in third party capital. Building inroads could prove a plodding affair.

“It is a slow go and will take time for investors to get comfortable with things like social inflation. The interest is there to do something different, but the industry has to prove that they are going to make a return on investment,” she said.

To date, a wide swathe of would-be investors who “should be very interested” have backed off in the face of barriers in the form of volatility, an ineffectual reinsurer response to volatility and horror stories about long claims settlement times that lead to trapped capital, CEO of Guy Carpenter Europe, Massimo-Reina, said. “Investors don’t like surprises and don’t like the famous unmodelled perils to creep in,” Reina said.

“We all need to work really hard to improve our tools to make this business more manageable. The potential is definitely there, but that is in our hands.”