Analysts at RBC Capital Markets have suggested that a retrenchment in the alternative capital space has led to a further tightening of the retro market from 2022, causing a “ripple effect” on the available of capacity in the reinsurance property markets.
Commenting on the current hard market environment and on specialty re/insurance in particular, RBC noted that reinsurers managed to secure both more favourable pricing and better contract terms at recent renewals.
Yet alternative capital inflows remained “muted” despite the higher expected returns on offer, it observed, stemming from a combination of more optionality, portfolio allocation effects and a sense of scepticism following a string of underperforming years.
“Consensus is that there are more legs to this hard market, through 2023 at the very least, as further repricing is needed especially for US-based accounts which were loss impacted,” analysts wrote.
Indeed, RBC rejects the view that the drop in traditional capital levels has been primarily due to unrealised asset losses, as this didn’t ultimately trigger changes to financial strength ratings, which would have impacted commercial decisions.
The result was beneficial for reinsurers who write both reinsurance and retro coverages, as well as those that have better relationships with retro providers, and have larger balance sheets.
And looking ahead, RBC expects that more retro cover will be sought through the year as reinsurers continue to adjust their exposures over the later renewals.
Other factors that could give reinsurers an edge over the broader market this year include proprietary underwriting tools and more diversified risk profiles, RBC added, particularly as firms continue to diverge in their renewal approaches to nat cat risk.
“Capital isn’t an issue either based on the regulatory solvency ratios at very healthy levels,” analysts explained. “Rather we think the binding constraint might be investors’ appetite towards earnings volatility inherent in cat risks, especially for carriers with poor recent underwriting performances … One might rather take slightly less return upside in exchange for more certainty of expected earnings which are already at good levels.”