On the road to reinsurance renewals: Next stop, Baden-Baden and APCIA
Reflections post Rendez-Vous de Septembre reinforce cautious optimism ahead of 1 January.
With the Rendez-Vous de Septembre now in the rear-view mirror, momentum begins to build toward the looming reinsurance renewal period at Jan 1.
Each year, AM Best meets with reinsurance industry participants in Monte Carlo to discuss top-of-mind issues facing the market and share our own perspectives. In that regard, it was business as usual, and with a theme of cautious optimism amid the hard market, albeit offset by greater-than-usual uncertainty from macroeconomic and structural headwinds. That came as no surprise – this market cycle is very different from previous ones.
Price discovery has taken longer than expected. Claims patterns, as well as inflation and interest rate trends, have caught market participants on their heels. After several years of disappointing financial results, reinsurers have become much more cautious about deploying their capital.
That said, it is important to recognize the difference between “available” and “deployed” capital is critical. Available capital is not under pressure – the largest, well-established global reinsurers either still hold plenty of “dry powder” or are very well-positioned to raise capital without much difficulty.
At the same time, these well-capitalized players have become much more selective allocating their capital, which pressures the deployment of capacity. Incumbents with a proven track record are in the best position to raise capital if there were to be a need, while potential start-ups face scepticism from investors in a segment where risk premium is elevated, given the volatile results from recent years.
In previous cycles, following a large event that would deplete significant amounts of capital, we would expect to see a new influx enter in the shape of company formations that are particularly specialized with a clear remit. In actuality, what is happening is that a number of large players have moved toward achieving a very diversified business portfolio, with the best-performing companies in the market turning away from reinsuring pure catastrophe risk.
Instead, they've been trying to take advantage of the better margins seen in the primary sector; for example, tapping into specialty excess and surplus lines business. From an investor's point of view, this model gives them the opportunity to play with several levers, depending on how market conditions change. This model is much more flexible to adjust in these market conditions.
The rise of ILS
Another trend to note that has become more solidified over time includes the rise of the insurance-linked securities (ILS) sector as an integral part of the market. Working with traditional players as a partner, third-party capital has been accepted as a key component of most major reinsurers’ strategies, instead of being viewed as the competition. In turn, the market has set itself up to be able to achieve a reasonable rate of return to satisfy the investors that would be willing to continue to support the market on a go-forward basis.
To do so, the reinsurance segment in many respects has curtailed providing the kind of income-statement protection primary insurance companies have been used to. Attachment points have gone up; retentions and co-participations on the primary side have gone up.
With the additional frequency and severity of large-scale and secondary peril events, reinsurers are stepping away from that protection or moving up to higher layers to achieve a reasonable return. For the primary sector, what that means is increased volatility.
The difficulty is that reinsurance is meant to act as a partner for their primary companies, and some primary companies that don't have the financial flexibility or diversification to handle localized events have come under strain from a ratings standpoint.
MGA-placed risks
As part of that flight to diversification, reinsurers also have increasingly provided capacity for MGA-placed risks as a means to get closer to the original primary-like risks. MGAs have become a critical distribution source, but the longevity of private capital investments is a concern for reinsurers.
There’s the adage that “risk is opportunity,” yet the potential is there for a misalignment between private equity and insurer concerns with regard to risk appetite and who is ultimately on the hook for the risk exposures. That aspect is one of the reasons why AM Best feels its performance assessment on delegated underwriting authority enterprises, such as MGAs and other similar entities, is so important to the insurance industry.
Still, reinsurers remain well-capitalized. The strong pricing and tightened terms and conditions is driving an improvement in underwriting results. We expect that to continue in the future. Highlighting their flexibility, the much harder market conditions since the start of 2023 have renewed interest in property catastrophe risks, again, under much tighter terms and conditions.
Reinsurers continue to evolve in response to emerging risks and more complex risk scenarios. They no longer solely serve as a financial safety net for their clients; they’re enabling business, blurring the line between insurer and reinsurer.
As the industry closes the book on another successful Rendez-Vous de Septembre, it turns its attention to the next important event on the reinsurance calendar – Baden-Baden, where reinsurers, cedants and brokers dive deeper into their discussions on the renewal and structure of reinsurance contracts.
The specifics on how macroeconomic and market dynamics, as well as the optimization of capital, will manifest themselves in renewal agreements will become more apparent in coming months, but reinsurers by and large have realigned their risk profiles and now are in a strong position to generate the underwriting profits that had been elusive for a number of years.