Analysts at Goldman Sachs have forecast that a combination of higher underlying general inflation and the impact of climate change will drive a further hardening of the reinsurance market through 2022 to 2024, with ROEs improving to or above their targeted range.
The firms notes that the reinsurance cycle has lagged behind the primary insurance cycle in recent years, but is now starting to catch up and is likely already in the hardest part of the cycle, as the market recoups the losses from the recent catastrophes and COVID.
Looking at the biggest European reinsurers, Goldman Sachs therefore expects ROEs generated over the next three years will be toward peak cycle ROEs, assuming normal weather losses.
Interestingly, analysts view the reinsurance cycle going into 2022 and 2023 is driven more by risk aversion than a lack of capital, as the supply of reinsurance continues to comfortably meet demand.
Instead, many reinsurers are adopting a more moderate risk appetite following several years of elevated catastrophe losses, in addition to the impact of COVID, which meant European reinsurers have struggled to achieve their profitability targets since 2017.
“We believe the reinsurance cycle could catch up with the primary cycle through 2022 and 2023 given the concern and expectation that the experience of the past five years could be the new normal of higher weather losses due to climate change,” Goldman Sachs analysts stated.
“We believe we could see pricing momentum continue into the remainder of 2022, particularly if capacity/capital is limited due to a decline in retro reinsurance being available at January,” they continued.
“Furthermore … we believe climate change and more volatile weather will be a material medium-term tailwind for the reinsurers, as they are the lenders/insurers of the last resort against weather losses, and their capital will be even more valuable in a more volatile world.”
Looking at the London Market specifically, Goldman Sachs believes rates have lagged in reinsurance given the importance of third-party capital in this market, which to some degree moderates the price increases as capital can enter the market quicker.
Furthermore, many of the new entrants in this market are focusing on reinsurance, as a reinsurance start-up needs small underwriting and claims departments as they write large ticket/high severity/low frequency risks.