New capital unlikely to affect hard reinsurance market: JP Morgan
With a “material move” in reinsurance pricing anticipated at the January 2023 renewal season, analysts at J.P. Morgan don’t believe new capital inflows will affect the trajectory of rates this time around.
“We expect an acceleration of pricing into 2023 with climate change, inflation and a capacity crunch leading to far harder market conditions even before hurricane Ian,” the analysts explained.
Looking back at previous hard markets in reinsurance, the analysts said, “Hard markets in the past have shown significant increases despite capital coming in.”
The examples of the post-hurricane Andrew and post-Katrina hard markets are given, when US property catastrophe reinsurance pricing accelerated significantly even with new capital flowing into the sector.
The analysts believe the industry is aligned on the need for harder rates now, as it was in those two cases, while in addition they do not believe we’ll see a significant resurgence in insurance-linked securities (ILS) capital inflows in time for the renewal season ahead.
“The major form of capital since 2010 entering the industry has been alternative capital,” the analysts wrote, highlighting weak returns for many in ILS over recent years.
“As a result, we would expect only limited appetite for new insurance linked security investors to enter the industry in 2023 meaning that new capacity that could temper price increases is likely to be limited,” they explained.
While hurricane Ian has hardened reinsurance industry resolve for higher pricing, J.P. Morgan’s analyst team rightly point out that “climate related concerns, inflation eating away at capacity as insured values increase and other opportunities for capital providers,” are all factors that meant prices were set to rise again anyway.
Despite the January 1 2023 renewal season having a significant European reinsurance focus, the analysts expect, “Price increases will move globally rather than regionally given poor loss experience in Europe in the last 2 years.”
In addition, “Reinsurers will be determined to push primary insurers’ retentions up to avoid some of the losses seen in recent years with Europe contributing to global catastrophe losses significantly in 2021-22 with the Central European floods and the French hailstorms the major issues.”
While the analysts say it would be “a bold view” to suggest reinsurance prices will rise as much as seen in previous hard markets, at the same time there were classes of new reinsurers launched and additional capital that boosted the sector in those cases anyway.
As a result, even if we see a wave of new entrants, plus some new ILS capital which may largely enter via catastrophe bond funds and a few specific fund raising efforts, the resolve of the reinsurance industry to raise rates further for 2023 is clear.
Many sources are stating the need for higher returns no matter the levels of capital in the industry, which could make for very interesting renewal negotiations this year and already we’re hearing talk of market participants being extremely cautious when it comes to setting out their stall on pricing too early.
Which is likely to lead to a late and challenging renewal again for January 2023, as market’s hold back to see just how hard the market could get.
In the meantime, this could make the catastrophe bond market appealing for those who can get out and tap into this source of capital in advance of the renewal.
However, with cash levels still seen as relatively low in many cat bond funds, maturities not abundant through the rest of this year and the pipeline being closely managed, it may be difficult for any new or speculative sponsors to find a space for themselves in the cat bond market until next year.
All of these dynamics point to challenges, but also to opportunities for those with capital to deploy, or the ability to raise some fresh capacity for 2023.
