A reinsurance tipping point. ILS inflows unlikely to fill capital gap: Howden

The reinsurance market has reached a tipping point, as the three C’s of climate, conflict and capital coalesce to reduce available dedicated reinsurance capital, with this decline unlikely to be replenished before year-end by inflows of alternative or ILS capital, broking group Howden has explained.

Howden and its reinsurance division Howden RE, cite structural shifts in supply and demand dynamics across the marketplace, driven by secondary peril losses, geopolitical turmoil and reset macroeconomic fundamentals.

These pressures reduced dedicated reinsurance capital at the mid-point of 2023 and Howden believes that reduction will not be clawed back by the end of the year.

As a result, the reinsurance market will go into the key January 2023 renewal season with less available capital than it had a year prior, the first annual decline since 2008.

Howden does not believe the insurance-linked securities (ILS) market will make up the difference either, as “On this occasion, alternative capital inflows are unlikely to make up some of the difference (unlike in 2011/12 or 2017/18),” the broker said.

As a result, “2023’s reinsurance renewal cycle is likely to see further pricing pressures, irrespective of whether the wind blows this year or not,” Howden explained.

“Innovative thinking around matching risk to capital is needed now more than ever,” the broking group continued.

Adding that, importantly in the current marketplace, “Differentiated capital market expertise is just one area where intermediary advice can help cedents secure the best and most cost effective coverage available in the current environment.”

The structural headwinds are expected to persist, with Howden saying that, “Challenging reinsurance renewal conditions look set to be sustained through the rest of this year and into 2023 as major macroeconomic and geopolitical realignments, along with pre-existing pressures, coalesce to create some of the most dislocated market conditions for the best part of two decades.”

Howden notes that the current market dynamic and reduction in capital is a particularly big deal for the reinsurance market.

“This is a major development for a sector accustomed to strong capital growth. Static or reduced supply, accompanied by higher demand, is likely to persist into 2023.

“Even accounting for some normalisation of financial market volatility in the second half of 2022, which is far from assured, capital losses are unlikely to recover fully at year-end,” the company explained.

“Any year-on-year decline in reinsurance capital at the end of December would represent the first full year reversal since 2008 – likewise with risks assumed exceeding traditional capital – and provide further impetus for a period of market firming.”

Bradley Maltese, CEO, Howden RE commented on market dynamics, “After years of excess capacity, loss uncertainty and the changing world order have combined to create some of the most challenging market conditions in two decades. Pricing and risk appetites are responding accordingly. No two cycles are the same, however, and new capacity could very soon be enticed into the market, given current rating levels and the higher potential returns on offer.

“Capital providers’ price expectations have continued to shift in line with structural changes to the loss environment, meaning that 2023’s reinsurance renewal cycle is likely to see further pricing pressures. Loss experience from here will be crucial: whilst pressure will increase if the wind blows this year, it will be more muted off the back of a loss-free second half. Choosing your intermediary carefully is essential in helping cedents secure the best and most cost effective coverage available in the current environment.”

Elliot Richardson, Chair, Howden RE added, “Unlocking capital in order to find solutions for risks that may soon outgrow the sector’s capital base will be crucial to maintaining relevance and offering clients coverage that meets their rapidly changing needs. Clients demand better data, world class analytics, scale and a unique blend of capital markets and risk transfer. In these market conditions, clients need a new approach to broking that is innovative, aggressively entrepreneurial and home to the sector’s strongest talent. In 2023, Howden Tiger will be delivering just that.”