Reinsurance “harder for longer”, alternative capital supply a factor: Berenberg

Reinsurance rates and pricing are forecast to “remain harder for longer” in the current elevated interest rate environment, with a reduced supply of alternative capital expected to continue to be a driver, as institutional investors such as pension funds continue managing their allocation limits, analysts at investment bank Berenberg have said.

With the expectation now being that interest rates are set to remain “higher-for-longer”, this leads Berenberg’s analyst team to suggest reinsurance rates can now remain “harder-for-longer”.

For reinsurers, the analysts sees this s particular positive, as reinvestment yields drive earnings and returns-on-equity, but “particularly positive” is also the fact higher interest rates will likely restrain reinsurance capital supply somewhat, helping to sustain the hard market.

This is because, “in reinsurance alternative capital providers include pension funds and, as interest rates rise, the pension funds’ willingness to allocate more assets to alternative risk classes like reinsurance reduces, so the reinsurance capital from this source diminishes,” the analysts explain.

Alongside this, the need for insurance and reinsurance capital is “up strongly”, with the increased cost of natural catastrophes and higher claims from social inflation, as well as other inflationary and exposure related effects, all driving a need for more risk transfer and protection.

This is especially true in the United States, where the analysts see the need for capital for re/insurance as greatest.

The reduction in supply of alternative capital is now helping to sustain a hard reinsurance market at a time when the need for it is growing.

Which, in our view, means that even though there is clear evidence that parts of the insurance-linked securities (ILS) market are growing, such as catastrophe bonds, the flows of capital coming to the space may not be sufficient to outweigh the growth in demand, which would be a key catalyst for hardening to be sustained.

In fact, ILS fund managers we speak with, while bullish on their ability to raise additional funds, are not looking to ramp up their assets significantly at this time.

We’ve spoken with a number of collateralized reinsurance fund managers who say that they are more focused on right-sizing their assets to the opportunity, being more selective on cedents they deploy capital to, freeing the capital that was trapped and ensuring they can move forwards in such a way that sustains higher performance levels for their investors.

This is a message we are hearing quite broadly in the market, at this time, that managers themselves are less-focused on raising assets, than they are on delivering performance, which bodes well for a better maintained and managed equilibrium of supply and demand across reinsurance and retrocession.

Just last week, John Seo of Fermat Capital Management said in Bermuda that, while he is seeing very strong interest from investors, that interest is much slower moving now, which can also be a factor in sustaining rates at higher levels for longer.

Berenberg’s analyst team also cite the fact reinsurers have adjusted their positioning in the risk tower, to shift risk back to the primary side (who are now retaining more), while also reducing volatility by slowing the supply of capital to products like aggregate reinsurance considerably.

Which are all in response to results and losses suffered in recent years.

On which the analysts state, “This set of linkages between nat cats and interest rates, and between primary insurers and reinsurers, means that higher interest rates, unlike in previous cycles, are associated with a continued hardening of pricing.

“This is why we believe that the market will remain harder for longer, and potentially this means that reinsurers will likely report rising profits well beyond 2025.”

Which reads-across very positively for the ILS community as well.