New capital will dampen rate hikes: Acrisure Re

Given the scale of losses faced by the industry over the past 18 months and growing questions over whether current pricing is adequate to meet the risks the market is taking on, attention has turned to this renewal season to hopes from some quarters for significant rate rises in reinsurance.

With investors eyeing the market’s failure to meet its cost of capital for the past five years and concerns about risks ranging from climate change to cybersecurity, there have been calls from several carriers for increases in pricing to meet the risks at hand.

However, at the same time, capital continues to be attracted to the industry as rock-bottom interest rates around the globe push investors to hunt for returns elsewhere, and this dynamic is throwing up uncertainty over whether prices will rise at the rate that carriers hope.

Acrisure Re partner David Sowrey spoke to the 1.1 Club, Intelligent Insurer’s online, on-demand platform for one-on-one interviews with industry leaders, to discuss whether reinsurers will get the rises they hope for this renewal season.

For Sowrey, the question of what impact this new capital will have on the market at a time of shifting dynamics remains one of fundamental supply and demand.

“With capital still attracted to the industry despite the spate of losses suffered this year and last, it is only natural that this will exert downward pressure on pricing for reinsurers,” he predicted.

“It’s inevitable, it’s just basic economics. When we look at supply and demand we’ve seen material volumes and plenty of new capital come in. This isn’t naive capital,” he said.

“These are businesses that are run by market veterans, experts in the space, people with great relationships and good distribution plans. They are making their presence felt and I think it’s inevitable that it would have had some dampening effect on the market.

“It’s capital that drives market conditions more than anything else and at the moment, an influx of opportunities has come in. The new capital does seem to have been deployed, so that is encouraging.”

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Better conditions

On the insurance side, Sowrey said, there are definitive signs of hardening in some segments, particularly cyber—which he said was “extremely hard”—and there were elements of more favourable conditions for buyers in segments such as casualty and specialty.

“However, in the reinsurance and retrocession markets, there remains plentiful capital to meet demand, with the sector split between harder dynamics in the lower parts of programmes compared to higher attachment points.

“In terms of reinsurance markets, I think with the losses we’ll see some sort of stabilising and firming on property reinsurance, as well as on the cat side of the business. On the retro side, the losses will have an impact. Retro continues to see an influx of capital, but capital is being more selective in terms of where it attaches,” he explained.

“We’re seeing less capital playing in what I would call the former CATCO space—the low-down attaching area—and we’re seeing investors looking for potentially higher attachment points and staying away from what I refer to as the working layers.

“On the retro side, there have been some issues over trapped collateral, those have manifested themselves, not just on catastrophe losses, but also on COVID-19.

“We’ve seen some issues of trapped collateral that relate to the pandemic. The retro market will be interesting, it will be hardening in some spots, and not in others. The further up you move in programmes, you’ll see more opportunities and options around capacity, particularly from the rating carriers as well.”

Despite the challenges that have hit the market over the last two years, ranging from the pandemic to the growing realisation of the scale of the challenge stemming from climate change and secondary perils, Sowrey believes that the market has coped well.

In addition to serving clients, it has also had to grapple with the challenges of working remotely and negotiating complex policies via videoconferencing, a stark change for an industry built on the relationships and connections that come into focus at events such as Baden-Baden.

“The insurance markets have done phenomenally well in the last 18 months. I’m not just talking financially here—I mean in terms of the way the sector has serviced its clients, and the way it’s adapted to a completely different working environment,” he said.

“Most of the businesses I’ve heard of have adapted very well, and almost embraced the change. We know that COVID-19 will definitely bring changes to how we work.

“From what I’ve heard, most businesses have done very well as we have moved now to flexible working.”

To view the full 1.1 Club interview click here