Reinsurers at crossroads but ‘balance is required’: Gallagher Re CEO

The reinsurance market is at a crossroads—and at the forefront of this is the global property market. As the industry faces unprecedented challenges, the opportunities to innovate and bring solutions to emerging challenges have arguably never been greater. This is a moment for reinsurance.

Tom Wakefield, global CEO of Gallagher Re, began with some strong statements as he addressed the pivotal role of the reinsurance industry in managing emerging risks and opportunities ahead at the Intelligent Insurer’s Re/insurance Outlook Europe 2024 conference in Zurich on Day Two.

“The reinsurance industry has played a pivotal role in protecting the global economy and ensuring resilience over the course of many decades,” said Wakefield. “If this has ever been in doubt, the last few years of challenging times have brought it sharply back into focus.”

Wakefield pointed to significant shifts in the market cycle, describing it as “arguably the strongest and most synchronised hardening in more than a decade.” He noted that multiple catastrophe events and high property losses since 2017 have transformed views on risk, bringing the theoretical threat from climate change to the painful reality of the property markets.

He also addressed the financial reverberations of the Covid pandemic, supply chain bottlenecks and economic inflationary pressures. “While some economic pressures have abated, complex social and traditional changes from crises continue to pressure many long-tail classes, distorting loss development patterns,” he said.

“Emerging geopolitical risks continue to mutate bringing new challenges to marine energy, aviation cyber, political violence and terror to name a few,” he added, emphasising the need to adapt to advanced technologies like generative AI and energy transition “to stay relevant”.

Despite the challenges, Wakefield highlighted the industry’s improved financial health. Gallagher Re’s analysis shows that globally, capital dedicated to the industry increased 12% last year to a record high of over $700 billion.

“We estimate that the global reinsurance ROA in 2023 was 20%, easily the best performance in the last 10 years,” he stated. This improvement is driven in large measure by significant price and deductible increases put through recent years and most small parts were significant tightening of terms and conditions, he said.

Looking ahead, Wakefield is optimistic about the reinsurance market’s performance. “With the exception of the property reinsurance cycle, which is beginning to ease, we can expect the overall reinsurance market’s performance and capital position to remain robust,” he said.

He believes that the past price increases and higher interest rates should continue to push underlying returns higher and keep ROA “always comfortably above the industry cost of capital”.

‘Talking about the casualty market as a single line of business is like painting the Mona Lisa with a roller brush and wondering why the result lacks finesse.’

Addressing the lack of new entrants in the market, Wakefield said: “The improved health of the industry provides reinsurers with the opportunity to lean into complex risk challenges of their insurance clients and partner on solutions. A feature of prior market corrections has been the inflow of new entrants with clean balance sheets to harvest the attractive economics that are available. This has been absent from this cycle.”

What this means for the reinsurance industry? “Strong retained earnings have increased existing participants ability to deploy more limits but a lack of choice of genuine reinsurer levers can at times be a concern. In addition, free cash flow increases may well stimulate more M&A activity such as the RenRe-Validus Re transaction, and lead to even less choice among fewer and fewer large incumbents,” he said.

Wakefield also highlighted new capacity coming to the market through inflows into cat bonds and cycles. “2023 was a record year for capital issuance, and 2024 is on track to set another record,” he said. These instruments could particularly help property risks when the market is sophisticated. If the challenges in the casualty market intensify, “I wouldn’t be surprised to see new entrants coming in with a clean balance sheet story,” he said.

He explained that it’s a paradox that the absence of new entrants has driven the revaluation of reinsurers in financial markets. “As the industry showed more pricing power, investors reassessed their view of low barriers to entry and increased their assessment of normalised earnings power across cycles,” he said. Higher franchise values also increase incentives for new entrants and potential competition.

‘Balance is required’

“In my view, balance is required,” Wakefield asserted. “The long-term interests of insurers are not served by severe cyclical swings of both the availability and the price of reinsurance capital that sometimes accompanies excess competition.”

For the market to remain efficient, innovative and reduce systemic risk, “it requires competition from both within and outside the industry.”

Addressing the property market, Wakefield said it is “on the front line when it comes to our biggest global challenges.” New solutions like parametric insurance are emerging to address these challenges.

“Overall, the prospects of growth in the property market look good, at least for now. Increased current demand is being met with adequate capacity. There is also a good appetite from alternative capital providers with a record $50 billion was issued in 2003,” he said.

So where does the market go from here? “Dealing with this challenge is not easy given the underlying insurance risk even for whitelisted perils is increasing, and not diminishing. And the impacts of circular secondary perils have revealed the gap in a model view of risk versus the real risk,” Wakefield said.

Wakefield advised reinsurers and capital providers against holding back and urged them to lean into challenging property exposures. “It is imperative we move towards and not run away from emerging risks and earnings volatility.”

He likened discussing the casualty market as a single line of business to “painting the Mona Lisa with a roller brush and wondering why the result lacks finesse.” He stressed the importance of reinsurance in helping clients navigate pricing uncertainty and loss inflation.

He emphasised the opportunities for innovation in response to climate change and cyber risks. “We are heavily investing in energy transition and cyber risk management," he said pointing to the launch of PoleStar Re, the market's first-ever cyber catastrophe bond, as an example of innovation in the industry.

“By embracing technology and leveraging our expertise, while staying ahead of emerging risks, we’re well-positioned to navigate the challenges and seize the opportunities that lie ahead,” Wakefield concluded.

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