Goldman Sachs says that the industry is currently in the hardest part of a market cycle that is set to continue into next year.
The firm wrote a new note reflecting on the Twenty-Sixth Annual European Financials Conference. In it, it said that claims inflation, geopolitical uncertainty, and natural catastrophe are going to maintain the upward pressure on pricing.
It added: “Whilst the primary insurance cycle is likely to start to moderate, Nat-Cat pricing continues to harden, and the Swiss Re Chief Underwriting Officer believes we have moved from a hardening market to a hard market (as evidenced by the strong June renewals), and climate change and inflation could sustain this hard market for a number of years.”
The firm also had several comments to make around cyber insurance, driving capital efficiency through capital-light business models, and the opportunity for yield through private asset investment.
On cyber, Goldman Sachs said that the pandemic had led to a ‘material rise’ in ransomware, making the sector a ‘hot topic’.
It added: “EIPOA considers it as ‘high’ risk, and it features as the third-highest perceived risk among insurers. The impact of cyber attacks has been seen across geographies and pricing of the product is seen as a priority. Companies in the industry are split over whether cyber is an insurable risk, but we are seeing companies invest relatively heavily to determine the best approach to cyber insurance.”
The capital requirements arising from solvency II, said Goldman Sachs, had driven companies to have an increased, sharper focus on driving capital efficiency and returns. As a result, many were looking to unit-linked policies, over traditional savings products in Life, and are also investing in asset management.”
It added: “To this extent, companies have also entered into various reinsurance and disposal deals on back-books, to further free up capital. The focus going forward, especially for European composites, is likely to remain on growing capital-light businesses, which should in turn result in companies focusing on their technical underwriting profit, rather than depend on investment income (which we believe is less volatile in the context of macro movements and supports earnings sustainability).”
Last, Goldman Sachs said that its conversation with companies highlighted the focus that insurers, particularly those in the UK, have on increasing their private asset investments. It said that it believed that UK insurers hold the perfect ‘patient capital’ for long-dated private assets, and can benefit materially from yield uplifts.
It added: “Moreover, with the change in Sol II rules in the UK, the companies will be allowed more flexibility in investing in the private assets. Companies in the UK are optimistic about the bulk purchase annuity (BPA) market, and anticipate that the current macro environment will act as a tailwind to corporate balance sheet de-risking.”
It went on: “Indeed, over the past few weeks, the mega bulk annuity schemes (£10bn+ schemes) have started to consider BPAs, as the environment for pension transfers is very healthy, with high interest rates driving pension fund surpluses and wider credit spreads driving favourable pricing from the insurers. New BPA business should allow incremental investment in private assets, taking overall private asset investment higher.”