Reinsurance capacity can’t catch demand; market heads harder for longer

Capital in the reinsurance sector will not be able to keep pace with reinsurance demand for the mid- to long-term, nearly guaranteeing profitability will hold “higher for longer,” a key equity market brokerage said, adding to a growing consensus.

“Unless a significant amount of capital enters the sector, not only will the protection gap keep growing, but pent-up demand from existing business due to inflation and growing exposures will also be hard to be met,” analysts at the Berenberg brokerage wrote in a note to investors.

“This suggests pricing both primary and reinsurance will need to stay higher for longer for capital to be enticed back.”

A ratio of reinsurance capital to premiums has fallen below 1x for the first time since 2008 and is “unlikely to reach the previous peak of 1.54x and 2012-21 average of c1.4x” anytime soon, analysts wrote.

Little of the supply problem has been alleviated since interest rate hikes tanked bond valuations in 2022. And the evolving supply-side story, to the Berenberg ear, focuses more on lingering plans by American, European and Bermudian names to scale back nat-cat-exposed property lines in an attempt to curtail earnings volatility.

Berenberg is willing to admit the likelihood of a “steep recovery” on the supply side, to the tune of 8.9% compound annual growth in capital through 2030, but that leaves only slow progress against a forecast for 6.3% compound annual growth in demand.

That leaves Berenberg’s preferred capital to premium ratio hovering well below average around the 1x mark for at least two to three years, analysts noted.

Berenberg is just the latest voice in a growing consensus that the supply-demand imbalance that delivered the 2022-2023 hard market is well set in place.

Morgan Stanley last said that capital may accrete to the reinsurance industry at about a 5% pace in 2023 to add $21 billion to the tally, a far cry from the 14% or $61 billion shed in 2022. With that shortfall, and with demand driven by heavy claims inflation, the type of capital raising initiatives announced to date offer little to plug the gap. Everest Re made arguable the biggest go-for-growth headlines with a $1.5 billion secondary share offering ($1.3 billion net).

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