Reinsurance News

Capital constraints despite “very strong” pricing outlook for European reinsurance: JP Morgan

24th November 2022 - Author: Kassandra Jimenez-Sanchez

Prices for the European reinsurance market are predicted to be at some of the highest levels seen in the last 30 years, according to JP Morgan analysts.

J.P MorganAccording to the firm, some focused specialist reinsurers point to a pricing environment similar to the one seen post Hurricane Katrina. The JP Morgan report suggests two main scenarios:

1) Assuming prices increase as much post Katrina, which would put the Global Guy Carpenter Rate on Line at the highest level seen since 1995 with US prices at record levels, 2) rate adequacy is similar to that seen post Katrina, implying a ~35% increase in global property cat pricing and ~25% in the US. However, if either set of predictions become true, 2023 pricing will be at the best levels seen in many years, the firm noted.

JP Morgan also said that, during the recent 9M2022, it has heard from management teams across both the reinsurance and insurance space that the reinsurance market is showing signs of real changes ahead of the 1st January renewals.

The Lancashire management team has suggested that market conditions heading into 2023 were likely to be similar to those seen in the 2006 reinsurance renewals following Hurricane Katrina. Prices would need to increase around 35% to hit similar levels to those seen post Katrina.

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Despite a very strong outlook for pricing, analysts highlighted that there has only been limited commentary about new capital entering the sector.

They said: “In previous market backdrops like this, we have seen new classes of reinsurers formed in Bermuda ready to take advantage of harder market conditions. More recently, alternative capital has flowed in the industry but given poor recent performance and more attractive opportunities elsewhere, this will not be the case this time around in 2022/23.”

Analysts also noted that there are additional capital constraints from retrocession crunch and inflation. They said: “Inflation is a headwind to past claims but also increases insured values or exposures in the sector. With the price of many things increasing materially, this impacts balance sheets that have to take on more exposure just to stand still due to inflation.

“In addition, retrocession capacity is likely to be far more limited in 2023, which will limit gross exposure taken by reinsurers that are reliant on retrocession. In order to bridge the gap, reinsurers will need to use more of their own capital.”

In the report, analysts explained that one of the reasons why the market has stayed away from reinsurance in recent years has been freely available capital.

JP Morgan said: “Under quantitative easing, money became close to free, and therefore new money looked to enter the sector to take advantage of what had been uncorrelated and relatively attractive returns. However, with yields having materially increased in 2022 to combat inflation, in our view there are now far more attractive opportunities than what has seemingly been underpriced risk.

“At its 9M22 update, Swiss Re Chief Underwriting Officer Thierry Leger commented that he would not be surprised to see a 10-20% gap between demand for reinsurance and supply of capital, which based on his views would be a very significant gap to bridge.”

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