A positive track record of a high return on equity (ROE) is needed to attract fresh capital to the reinsurance industry, despite the substantially higher pricing seen throughout the year, according to Gianfranco Lot, Chief Underwriting Officer (CUO) of P&C Re at global reinsurance giant Swiss Re.
Pricing in the reinsurance sector, notably for catastrophe-exposed lines, is at its highest level for some time and the trend is expected to persist throughout 2023 and into next year.
In the past, hard market cycles have attracted new players into the space and an influx of capital as companies look to capitalise on rate firming.
While some have raised capital, it’s not been at the level seen in previous hard markets and nor has there been the emergence of a ‘class of 23’ reinsurers.
At Swiss Re’s 2023 Media Dialogue held yesterday, the firm’s CUO of P&C Re, Lot, was asked about competitors entering the sector during this period of market hardening.
“We observe the capital flows into the reinsurance market quite carefully,” said Lot. “We have not seen a significant influx of new capital into the reinsurance markets, even though the pricing that we’re seeing is substantially higher than last year, and already last year was substantially higher than the year before, but this one is really substantially higher.”
“I do personally think that a positive track record of high ROEs is necessary, quarter after quarter, before new, fresh capital comes into our industry,” he added.
According to data from reinsurance broker Gallagher Re, in 2022, the underlying ROE exceeded the weighted average cost of capital for the first time in a decade at 11.2%, up from 6.3% in 2021 and 1.3% in 2020.
However, the underlying ROE excludes investment losses/gains, the impact from prior year development, and also normalises natural catastrophe losses.
On a reported basis, Gallagher Re’s data for a subset of reinsurers shows that the ROE actually declined, year-on-year, from 11.4% to 6.8%, although remained above the 2.7% seen in 2020. In both 2020 and 2021 investment gains boosted the reported ROE, which was dragged down by COVID-19 losses in 2020 and high natural catastrophe losses in 2021. Last year, cat losses were also high, and combined with investment losses dragged down the reported ROE once again.
With more stability on the asset side of the balance sheet and higher pricing across the sector, reinsurers are expected to report improved results in 2023.
Of course, the Atlantic hurricane season is underway, and it remains to be seen what this brings in terms of losses, while secondary perils such as floods and wildfires continue to have an impact in many parts of the world, so there’s every chance the nat cat experience is again above the norm in 2023. And while another heavy loss year would surely prolong and potentially accelerate the hard market environment, it could also serve to dampen ROEs across the industry.
