Will retro hardening fuel reinsurance rating momentum at 1.1?

This week’s edition of The ReInsurer takes an in depth look at what is going on in the retro market, both through our lead news story and our latest virtual panel discussion focused on ILS.

The availability and affordability of retro will inevitably play a role in shaping the 1 January renewals. If, as some commentators are suggesting, the cost of cover escalates beyond a level that makes economic sense as a buyer, then other capital alternatives may make more sense.

Tightening in segments of the retro market was already taking place before Covid-19, of course, with investors concerned following several years of trapped capital from wildfires, Japanese typhoons and associated loss creep.

The shift away from aggregate cover for exposures such as wildfire had already started – in part because of limited supply – but will become more pronounced in the aftermath of current accident year losses.

Within our most recent virtual panel discussion, which is covered within today’s edition, it is suggested that there may now be a shift back towards retro being written through rated balance sheets, as was the case before ILS assumed its current dominant position in retro markets.

Indeed this was a theme in last week’s The ReInsurer when we revealed that Aeolus was exploring a rated carrier.

The impact of ILS capital had effectively shut off opportunities for private equity to capitalise on rate hardening in the aftermath of loss events for several years.

As Rupert Swallow, CEO of Capsicum Re (soon to be Gallagher Re) pointed out during an earlier virtual debate discussion, two to three years ago the “wall of ILS capital” coming into the industry meant the prospect of startups was slim.

Covid-19 has in some ways pushed the reset button with considerable talk now of a ‘Class of 2020’ and existing players in the broader P&C (re)insurance sector having raised roughly $16bn in the first half of the year for both opportunistic and defensive measures.

That figure equates closely with the total of disclosed Covid-19 H1 losses among P&C (re)insurers, a figure that is significantly below some of the preliminary estimates put forward as the market’s likely claims exposure to the event.

We also examine the Covid-19 loss picture within today’s edition. While more claims are expected in the second half of 2020, these will have to increase by several multiples to reach the level projected early in the pandemic.

This is unlikely to erode momentum at upcoming renewals. In both reinsurance and retro, there is sufficient appetite and awareness for the level of increases that will be needed to generate the necessary returns following several years of loss activity.

That supports the view of a market that has moved from the “U” or “V” shaped dynamic discussed this time last year, to a more “W” shaped market, as coined by Everest Re’s John Doucette in Q1 this year when he said there were already at that stage “nice improvements” and attractively priced opportunities in reinsurance to go with hardening primary and retro pricing.

Achieving these rate increases will ensure (re)insurers can recoup Covid-19 losses sooner rather than later through writing more profitable business. Investors in the sector will also likely benefit.

As Berenberg analysts have noted, many investors are likely valuing insurers based on an expected industry loss of $50bn. Even with room for some additional losses, current levels of disclosed losses mean these investors may be in for a welcome surprise if the industry’s exposure to the pandemic continues to develop more favourably than initially forecast.