David Flandro, Head of Industry Analysis and Strategic Advisory, Howden Tiger, has observed that dedicated reinsurance capital has recovered to near-record levels, enticed by generationally strong pricing and favourable terms and conditions in key lines of business.
“This, combined with a rapid recovery in traditional balance sheets has meant there was excess capacity for some placements. The structure of the reinsurance market continues to change, with alternative capital now comprising nearly a quarter of the total,” Flandro continued.
Still, According to Howden, capital raising continues to lag previous cycles amidst investor caution and higher financing costs.
“New inflows of $17 billion since Hurricane Ian made landfall in September 2022, much of which has been channelled into the catastrophe bond market, remain short of the (inflation-adjusted) $40 billion and $50 billion that entered the sector in 2001 and 2005 during similar timeframes,” Howden explained.
The firm stated that additional capital is needed to cover growing catastrophe exposures, but macroeconomic and geopolitical instability, climate change concerns, loss of confidence in catastrophe models, lacklustre returns, and attractive opportunities in other asset classes “contained commitments for much of 2023.”
However, Howden highlighted that sentiment is starting to shift now more distributed loss sharing between cedents and reinsurers is in place and profitability has been demonstrated.
The firm added that accelerating inflows into the catastrophe bond market is indicative of increased appetite across traditional and alternative capital providers and the attractive proposition offered by the sector heading into 2024.
The below figure, provided by Howden, shows how these interacting dynamics have changed reinsurance supply and demand dynamics in the last couple of years.
The firm concluded that despite the recovery in capital recorded in 2023, the sector’s significantly higher premium base, fuelled by inflation and increased risk aversion, means the solvency margin ratio (capital divided by premiums) remains at levels last recorded during the global financial crisis, reflecting tighter (but evolving) market conditions.
