Reinsurers could close capacity gap on power of single low-cat season

Just one year of below-normal cat activity and the reinsurance industry could refuel the capital tanks enough to close the market’s capacity shortfall and put paid to ongoing rate increases by the time of 2024 renewals, without the need for any new capital inflows, a rough and ready consensus amongst top re/insurance executives suggests.

“If we were to see a benign loss environment in 2023, we would question the extent to which the price increases will be pushed through in the 2024 renewals,” Deutsche Bank Securities’ chief analyst for the insurance industry, Hadley Cohen, said following his talks with top management across the industry at an investor conference hosted by his bank.

Even a “normal” cat year, now defined even at $100 billion, would leave the market only with “some incremental momentum still to go” on pricing, but possibly shy of what investors are already pricing into the outlook, Cohen said. The implication: fresh capital flows – traditional or alternative – could plug lingering gaps.

Top insurance executives are estimating the gap between reinsurance supply and cedent demand in the “mid-double digit range,” Cohen said of a rough consensus view emerging from his talks with managers.

In a benign to below-normal cat year, return on equity in the middle to high teens minus trend-level dividends would leave the industry with new capital “largely closing or entirely closing the mismatch,” Cohen said of the arithmetic.

At current prices, reinsurers are “very happy” to jump in with what capital they can deploy given what they perceive as a “shift in overall profit dynamics” to the benefit of reinsurers vs cedents, Cohen said of underwriter sentiment.

“There is clearly, and particularly among the larger reinsurers, a lot of appetite for catastrophe XoL lines of business,” Cohen said. “That is not US-specific; I think it is true globally and companies will look to take advantage of that through the upcoming July renewals.”

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