Souter: Reinsurance capital inflows sign of a healthy market

There are many questions being asked of the reinsurance industry as it heads towards one of the most uncertain January 1 renewal seasons for some time.

The disruption of the COVID-19 pandemic, ever-growing concerns about the impact of climate change on clients and portfolios, and myriad risks ranging from cyber attacks to hurricanes are set to make this year’s discussions more difficult than most.

Despite all this, capital continues to pour into the sector, with investors seemingly undeterred by the range of threats facing the industry as the demand for coverage has embarked on a distinctive upward trajectory.

Peak Re co-head of property and casualty, and director, global markets Andy Souter sat down with the 1.1 Club, Intelligent Insurer’s online, on-demand platform for one-on-one interviews with industry leaders, to discuss how the company is approaching these discussions.

Capital moving in

The shifting risk profile has prompted predictions of rate hikes across the board in January but, Souter said, the overall picture remains more nuanced with the broad capital base of the industry continuing to grow.

“The new capital coming in is necessary to support growth in regions such as Asia where there is increasing client demand for coverage, and the dynamic should be read as a positive sign of where the sector is heading,” he explained.

“There’s a distinction. You can look at the overall quantum of capital, and there’s no doubt it’s a healthy market. When you have new capital coming in and some capital leaving, we’re probably seeing a net increase in capital. What’s more important is what is the nature of that capital? And where is it actually flowing?” he said.

“There are a few things going on. Number one, if you look at regions, if you look at Asia, for example, we’re seeing very strong economic growth, and increasing demand in terms of reinsurance and insurance needs as the protection gap gets smaller.

“It’s across a number of different lines of business: property, and also areas such as health mortality, so that capital can be a healthy thing. That capital is needed to sustain this growth in insurance protection.”

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Alternative markets

Souter highlighted the impact of new investments and vehicles in the insurance-linked securities and alternative capital markets as key drivers attracting new investors to the sector, particularly in Asian hubs such as Hong Kong or Singapore.

He said that given the form of much of the new capital in Asia, it was unlikely to have a downward influence on pricing, particularly as it wasn’t in direct competition with the traditional market.

“It doesn’t necessarily compete with current capital, but it can be a way of sitting behind a range of carriers such as ourselves to deliver different kinds of solutions and more capacity. I don’t think this increased amount of capital in its own will necessarily dampen rates,” he said.

Souter highlighted that it would need to maintain the type of underwriting discipline shown by the rest of the market in order to avoid undercutting efforts by carriers to price risk at a sustainable level over the long run, even if it did ultimately provide more choice for the end client.

“There is an onus on that new capital to deploy it in a disciplined way that makes sure that our industry remains sustainable in the long term,” he said.

“An increase in capital is new competition coming into the market. Ultimately, who’s going to win? It will be the end consumer at the very start of the insurance chain. That can be no bad thing, with increased competition.”

He said the renewals would come down to the profiles of individual clients, with a blanket approach across the board unlikely to bear fruit.

“It depends on the market and the client. We wouldn’t want to take a one-size-fits-all approach,” he added.

“If you look back at the previous renewals, there’s been a lot of discussion around terms and conditions, around communicable disease and cyber. We’ve moved on from that during this year.

“As we go to January 1, it depends on the client and on the circumstances. But particularly if we look at Asia, our largest region, most of that market is relatively loss-free. So it’s more about the specificities of what the clients need.”

To view the full 1.1 Club session click here