Europe’s big four reinsurers stand to benefit from a continuation of favourable market conditions in 2024 on the back of strong outcomes at the mid-year renewals, driven in part by the lack of new capital inflows in the current hard market cycle, according to analysts at BofA Securities.
In contrast to previous hard markets, the current one has seen a notable lack of new capital entering the reinsurance sector.
Typically, as rates trend higher, new companies form, and existing reinsurers raise funds to take advantage of favourable pricing dynamics. While there’s been some capital raised from existing players in 2023 this has been limited when compared with previous hard markets and, so far, a ‘Class of 2023’ has failed to emerge.
For large incumbents this has been a surprise, say BofA analysts, “though nobody is complaining.”
Reinsurance rates have been on the rise since the January 1st, 2023, renewals, and terms and conditions have also tightened through the year as reinsurers looked to maintain discipline following years of elevated losses from large events and increasingly secondary perils, as well as the impacts of inflation on loss costs.
The fact the supply of reinsurance hasn’t inflated dramatically ensured a strong mid-year renewal season for reinsurers, with supply generally able to meet demand, although only at the right price and structure as sellers stood firm.
As noted by BofA analysts, re/insurance brokers described the mid-year renewals as orderly and disciplined.
Throughout the year, including at the June and July renewals, there’s been a notable reduction in frequency risk appetite from reinsurers, and as companies have raised attachment points, primary insurers are expected to bear a greater share of catastrophe losses in Q2, with wildfires and other secondary perils accounting for much of the losses.
The recent loss experience, particularly from secondary perils which are less well-modelled, is likely part of the reason new capital hasn’t flowed into the space as it has in previous hard market cycles.
Overall, analysts remain “constructive on the operational outlook for the European reinsurers and expect favourable market dynamics to persist into 2024.”
“While we see limited scope for further margin expansion in 2024 (absent any large losses), we see upside to P&C Re top-line growth forecasts given attractive margins,” the analysts continue.
It remains to be seen if capital does start to enter the sector in a meaningful way, and if it does, whether it’s sufficient to impact both pricing and discipline.
In property specifically, it’s been a challenge for reinsurers to make money in recent years, so many will be hoping that the hard market persists into 2024 and beyond.
Also, the bulk of the catastrophe loss experience typically happens in the second half of the year, and while forecasts for Atlantic hurricane activity are somewhat mixed, it only takes one storm making landfall in the wrong place, as seen with last year’s Hurricane Ian, to significantly push up annual insured losses.
