The extent to which improved market conditions for reinsurers will endure and the importance of maintaining continued discipline were the main talking points at the annual Bermuda:Re+ILS roundtable held at the Monte Carlo Rendez-Vous, sponsored by Aspen.
The event hosted 13 attendees from carriers, brokers and service providers who grappled with the biggest talking points of the Rendez-Vous – as well as debating Bermuda’s ongoing place in the global reinsurance markets.
Christian Dunleavy kicked things off by stating that the industry needs a long memory when considering the extent to which current market conditions will endure. It has taken hard work to get to a better place, and that should not be thrown away, he said.
“We want to ensure underwriting teams remember the hard work and hard years it has taken to get the portfolios to a sustainable level. That work is not complete. All the key indicators, macroeconomic and in our own portfolio, suggest that risk is increasing in the world.
“Therefore, it seems counterintuitive to undermine any of the hard work the industry has done to get to a point where we cover cost of capital. There are some areas where we are seeing competition, but we will focus on the bottom line over the topline.”
Peter Bell agreed that the market conditions are some of the best they have been in at least 10 years. He noted that Everest raised $1.5 billion less than a year ago which, combined with moves it made to reshape its portfolio, means it is well-positioned to now grow and take on more risk.
“We are well within our risk tolerances, so we see opportunity,” Bell said. “There is money coming into the industry but not much and we think rates will remain positive. There are definitely opportunities in specialty lines as well.”
David Govrin said his carrier has also restructured in the past two to three years but, he stressed, pricing is more complex and nuanced today because so many more factors are impacting risk, from climate to inflation to social inflation. “The fact is, you need more margin for the risk,” he said.
Stuart Quinlan said that current market conditions are exactly the reason Conduit Re was launched. Its founders anticipated the change which was also its pitch when it listed via an initial public offering in 2020.
“This is great timing,” he said. “We will soon have 68 people on Bermuda, and we think 2024 will be a great year for us. We are seeing much better rate.”
Paul Simons agreed, and said it is important always to put the client first. He said Convex remains client-focused and, especially as market conditions change so much, active engagement and transparency are more important than ever. “As a new market, we have the advantage of a clean balance sheet but we have to remain client-centric,” he said.
RETENTIONS WERE A GAME-CHANGER
Vincent Prabis added that market conditions remain good and highlighted the importance of how terms and conditions have changed. He noted that despite an active first half of the year, the balance of losses have been retained by cedants as opposed to reinsurers. “These are exciting times to be a reinsurer,” he said.
Tod Costikyan said that in the context of market conditions, Markel Re is in a phase of measured growth. He said this would focus on where it sees the greatest opportunities for return on capital and “that is also where the greatest need usually is”.
He added that the market represents a unique situation where all parts—property, casualty and specialty—have all seen rate increases. “The biggest question is how we maintain them to keep pace with loss trends but avoid rate fatigue.”
He pointed out that while there is high demand on the property side, that has the potential to impact spend in other classes such as casualty and specialty. “A lot of classes are competing for the same dollars,” he said.
Matt Britton agreed that rates may still increase in line with inflation and on a risk-adjusted basis, but said a bigger driver of better results for reinsurers is the way attachment points have increased.
“Their move away from secondary perils has translated into much better results. A lot of players realise that move has improved performance—so why move back?”
Carlos Wong-Fupuy agreed that the improved terms and conditions and attachment points the industry has implemented are more important than rates, although he also said rates are unlikely to soften in the next few years. He added that he is seeing existing players trying to expand as well as new entrants trying to raise capital—but said that it is tough to raise new capital at the moment, even with good management teams lined up.
Peter Dunlop also agreed on the importance of better terms and conditions. He said he is seeing this in cyber where terms are being tightened, but also in other lines. “We are seeing it in all coverages. Reinsurers want to get paid properly for the risk they are taking.The problem with terms is that they are often adjusted only after the horse has bolted—it would be nice to get ahead on this.”
Dunleavy also agreed on the positive impact higher attachment points and better terms and conditions have had for the industry. “They have been more important than rate because previously losses from unmodelled perils were driving performance. Rate is important but moving retentions up more so.
“We ended up in a position of providing earnings protection, which is not what we are there for.”
John Huff said this trend boils down to a greater awareness of risk—and contracts being tightened in a way that is adding value. “It is not just rate adequacy, the lawyers are the new underwriters. They have finally had their day and are adding value.
“People are now having to specifically identify risks they cover such as standalone cyber, or climate risks.”
GOAL MUST BE SUSTAINABILITY
Brad Adderley said this can only be a good thing for the market. “That should mean the market will endure, that it becomes more sustainable.”
Govrin added that as a result of all the changes described, risks and the way they are managed by the industry are much more complex now. “That won’t change any time soon, which is good. One of our historical problems has been contracts not specifying exactly what is covered. Contract language is pivotal.” He thinks the industry has now improved on this front.
Neville Ching, the only broker at the event, said that after a difficult last renewal, things are now smoothing out. He highlighted the importance of brokers in changing times.
“A broker’s role is about managing expectations and relationships. While some things become commoditised, key relationships remain core and we remind our clients of that.
“Sometimes, that might mean concessions to those who have supported you over the years, but stick with them. There is no fresh blood coming in; stick with the family you have.”
On the topic of new capital, Wong-Fupuy said that one reason he feels there have been no startups is because there has been a flight to quality by cedants, due to the uncertainty. “There is increased demand, but not for any player. They want credit quality and diversification.”
Commenting on the $1.5 billion that Everest Re raised, Bell notes that it was possible on the back of decades of experience in the business. While he thinks new capital will enter, he does not think it will change market conditions and agreed that relationships should come first. “We trade on our relationships, they are key to us.”
Britton made the point that another reason more new capital has not arrived is that investors have a much wider choice of investment opportunities now due to higher interest rates. He also cited “investor fatigue” with the industry after many years of losses.
“One year of good results is not enough for investors to flood back in,” he said, although he did note that cat bonds had a robust first half, suggesting their liquidity was important to investors.
Adderley agreed: “It seems harder to form startups now. Pricing is complex and investors are burned. They don’t necessarily believe the hard market will last. It is difficult to establish something new and access business.”
Dunlop agreed, saying he has seen projects for startups that looked positive stall after six months. He suggested that the drivers behind this market are different from previous ones, which were typically triggered by a single big loss.
“This is more driven by the industry being persistently underpaid for a period of time and the hard market is addressing that.”
Dunleavy agreed: “The issue was not a shortage of capital, it was about getting paid. This market was not created by a destruction of capital, rather it has been a sustained period of low returns.”
Wong-Fupuy agreed, noting that where there has been pressure on ratings, it has not been due to balance sheet issues but performance. But he expects reinsurers, now more cautious in how they deploy capital, to make a good return this year. He notes that despite the first half being busy for nat cat events, cedants, not reinsurers, will bear the brunt of those losses. “Reinsurers are in a good position, barring any catastrophe event.”
Govrin added that there is no shortage of capital—and new capital is not needed—but discipline is key. “There is no supply-demand imbalance at the clearing price. Will people chase rate down? I know we are disciplined and I think everyone else here will be too.”
Simons added that the industry must finally deliver this year what has been promised to investors in the past.
“All the good work is done, we now need to show the returns. If you think back to 2017, there have been so many things to throw us off what we promised as an industry. It will be nice to demonstrate that we can do it. The industry is in a better place this year.”
There were some warnings. Costikyan noted that companies in the casualty space could absorb some pain from previous years of business, which could drag on earnings. But he also noted that higher rates could offset that.
“If we make it through the rest of the year with no major events, the market could earn a good return this year—but it also depends on your business.”
Commenting on the ILS space, Prabis noted that the reasons for investors showing an interest in the sector has pivoted. In previous years, some were chasing yield due to the low interest rate environment, and they also liked the interest rate protection offered by ILS. Now, that has changed. They are again realizing the value of its uncorrelation with other asset classes.
One of the challenges for collateralised deals has been trapped capital. The participants agreed this is a problem the industry must solve, but Dunlop suggested a simple solution: “The easiest solution is just to be profitable. That has been the challenge. But this should be the year that reinsurers build their capital basis and balance sheets again.”
First Published in Intelligent Insurer, September 2023
For further information, please contact:
Brad Adderley, Partner, Appleby