David Flandro, Managing Director at HX Analytics, has said that the re/insurance market is “clearly going through a period of dislocation” when it comes to pricing, with multiple factors set to influence trends at the upcoming 2022 renewals.
Speaking as part of HX’s re/insurer earnings review for Q3, Flandro noted that confidence in price increases has grown in recent months, particularly for reinsurance, although this varies by region and class of business.
“The general attitude right now is bullish,” he said, pointing to a rebalancing of capacity.
Flandro explained this rebalance aims “to address asset light business opportunities, but also generally where capacity is needed and where exposures allow. Also capital requirements have become increasingly important in this higher risk premium environment.”
Other factors influencing prices include the increasingly important role of capital requirements in the higher risk premium environment and the growing efforts to address inflation, he added.
And compounding these trends is the stubbornly high level of catastrophe losses, with Hurricane Ida and the European floods in particular driving a fifth consecutive year of above-average costs.
“Just drilling down a little bit on price,” Flandro went on. “We’re clearly going through a period of dislocation, purchasing behaviours are changing, carriers are preserving capital and deploying them towards growth opportunities. And there’s a real demand and supply imbalance right now.”
“Capacity inelasticity is influencing pricing in most lines and particularly at the margin. Some of the redeployment of capital is going into financial lines not to mention cyber and casualty, and there is now some trapped collateral again within the ILS market which is constraining supply at the margin, as we said.”
Flandro further observed that, looking back to early quarters of 2020 price increases were significantly higher than premium increases.
But comparing that with the situation now, premiums are catching up to pricing and they’re now almost completely caught up, which he believes is a sign of pricing momentum, and that premium growth may be bolstering pricing in the current market.
Looking ahead, Flandro highlighted investor pressure as one of the main factors that will influence re/insurance trends, which could result in further use of captives and asset light vehicles more to enter new lines of business, including reinsurance.
Related to this, HX expects the sector to be influenced by the continued near-term pricing upside with a volatility price tag to address macro uncertainties.
“There’s a lot of confidence in near term pricing at the moment, and much of that is being driven by heightened risk premia, read higher cost of capital,” Flandro noted.
Other factors to watch include the aggressive actions of re/insurers to address inflation and initiatives to use technology to create higher returns, particularly on the expense side, but also on the underwriting side, and to implement ESG into underwriting.