Impact of new entrants & new capital to be limited at 1/1 renewals: AM Best
Rating agency AM Best has maintained a Stable outlook for the global reinsurance sector, while warning that appetite to provide new capital, on either the traditional or insurance-linked securities (ILS) sides of the market remains limited.
As a result, AM Best believes that the impact of new reinsurance market entrants, so start-ups, new ILS managers, or perhaps vehicles like collateralized sidecar launches, as well as new capital supplied to existing market players, either reinsurers or ILS funds, will be limited, despite the evident hard market opportunity that is emerging.
There is no “Class of” vintage of new reinsurance start-ups coming through for 2023, it seems. With any significant moves to start new reinsurers of any size having struggled to raise capital in recent months.
Likewise, ILS capital raises are not expected to be significant in scale either, given the still evident caution investors are applying to the sector, especially on the collateralized reinsurance and retrocession side.
Catastrophe bond funds may prove to be a brighter spot, in terms of being able to raise capital to support the pipeline it seems, although with the pipeline being pushed-back somewhat, to manage issuance flow to match available market capital, that still isn’t going to supply a significant inflow of new reinsurance capacity.
Commenting on the traditional side of the market, AM Best said, “Unlike previous hardening cycles, new capital has not had a material impact on market conditions. After early signs of enthusiasm and the emergence of a few start-ups since 2019, execution has been slow and inconsistent. Regulatory and recruitment delays have played a role.
“Business plans have been downsized or changed suddenly based on opportunistic deals rather than on solid strategies. Several projects have not yet seen the light of day. Crucially, investors remain extremely cautious.”
While on the ILS and third-party capital side, “Third-party capital, while typically is expected to react more swiftly to market conditions, seems subject to the same level of skepticism. More restrictive covers, terms, and conditions are commonplace.
“Despite higher demand and improved pricing, the volatility of recent claims remains the key issue. Issues with regard to trapped capital have not gone away completely. “Loss creep” remains well within the memory of investors.”
As a result, the price-moderating influence of new capacity won’t be a factor at the January 2023 reinsurance renewals, it seems.
Because of this, the market is moving forwards with an expectation that rates become truly hard and pricing reverts back to levels last seen at previous hard market periods.
The caution among investors is affecting the ability of both sides of the market to raise new funds, although we are hearing of some success in the offing among established reinsurers, as well as cat bond fund managers.
The problem is that, while catastrophe loss activity, inflation, economic and geopolitical volatility have all negatively affected the sector, the uncertainty over what lies ahead and the question of how high, in terms of pricing, is enough, are making investors leery.
AM Best believes that hurricane Ian may have proved to be a nail in the coffin for re/insurer and ILS fund investor hopes that catastrophe activity may have subsided to more historical levels, after the consecutive years of elevated loss activity.
As a result, upsizing or doubling-down on capital deployed into the reinsurance space is hard to stomach, while investors are looking to see that the industry can cover better cover its loss costs going forwards, making the quantum but also staying-power of a higher rate environment critical, we believe.
Positively, demand continues to grow as well, meaning that the opportunity is expanding in reinsurance, so as long as market participants can set prices at a level where profits can be sustainably delivered to capital providers, new capital should flow back in, in time.
None of which will help to fill the holes in capacity that are evident as the January renewals approach.
Retrocession capacity shortages are set to persist, with ramifications for reinsurers ability to deploy capacity, at the same time as which ILS capital will remain dented, on the collateralized side at least, meaning catastrophe capacity will also be in shorter supply for primary insurers.
All of which is layered with economic and geopolitical pressures, from inflation, volatile markets, and a general nervousness among re/insurers that means capital buffers are being held.
Not to mention the emerging reserve related issues being seen in some quarters, that some analysts feel could spread more widely.
The upshot is that, right now, there is nothing to slow the hardening of the reinsurance market as January renewals fast approach.
How prolonged the hard market could be remains far harder to predict.
But, there are increasing signals that a new pricing baseline may be set, which will please investors and capital providers and overtime could become the stimulus needed for the next “Class of” and capital influx.
Read all of our reinsurance renewals news and analysis here.
