Analysts at Berenberg believe that hardening market conditions will continue through into 2022, as reinsurers seek to earn returns above their cost of capital in the face of ultra-low interest rates, social and cost inflation as well as a prolonged period of above-average natural catastrophe losses.
Berenberg’s key takeaway from its discussions around the virtual Monte Carlo event this year is that reinsurance rates need to rise further, given that the hard insurance market is not currently driven by capital supply constraints.
With an estimated $85 billion of natural catastrosphe losses already booked and with more than a month of hurricane season to go, analysts believe that 2021 could be another record-breaking year.
What’s more, industry losses are now frequently exacerbated by the increasing frequency and severity of secondary perils, such as the European floods, which could lead to more rate hardening at the European renewals in January than was previously anticipated.
Given the underlying pricing trends, Berenberg continues to remain positive about the outlook for the reinsurance sector, given the substantial increase in underlying earnings power from four consecutive years of rate-on-rate increases.
However, at the same time it recognises that various headwinds that could continue to put pressure on companies’ earnings, as well as the lingering uncertainty regarding the medium-term impact of COVID-19 on casualty lines.
The greatest threat to the hardening market, in Berenberg’s view, is the potential for higher interest rates, which could result in the current underwriting discipline environment subsiding, as investment yields pick up.
Based on its discussion around the cancelled RVS event, Berenberg reports that Hannover Re continues to optimistic about the outlook for pricing in the reinsurance market and expects single-digit improvements in rates.
SCOR was also clear that at present there are plenty of opportunities to redeploy its excess capital into the ongoing hardening property and casualty (P&C) market, while Munich Re is looking to enact cycle management and is willing to walk away from business which does not meet its return requirements.
Swiss Re likewise continues to be optimistic about the outlook for the market and expects rate increases generally across both its property and casualty portfolios, albeit with slower momentum in some lines at the January 2021 renewals.
Interestingly, Berenberg analysts noted that the CEO of Swiss Re’s reinsurance division, Moses Ojeisekhoba, believes that COVID-19 is likely to have a bigger impact on the pricing dynamics of the market in 2022 and potentially even 2023 due to the slower-than-expected reporting of losses by cedants.