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Investors' demand for better returns hardens reinsurance market

Reinsurance rates are up across the board, especially in the short-tail lines (property and property catastrophe), panelists told participants at the 39th Annual Insurance Conference of S&P Global Ratings (S&P) on 20-21 June 2023.

Rather than only being a response to loss trends, panelists said this harder reinsurance market is driven by investors wanting to see a better return on their capital, according to a statement released by S&P. This means the increases are more sustainable than usual.

Despite higher reinsurance rates, demand from primary insurers appears resilient so far. Nevertheless, Mr. Wayne Peacock, president and CEO of USAA, a financial services company, noted that primary insurers will see more volatility as reinsurers raise rates or lower capacity.

Since 2017, reinsurance profits have been curtailed by property catastrophe (cat) losses, but Odyssey CEO Young was optimistic. He dubbed 2023, "The year of CAT" and called it "probably the best CAT market" he's ever seen.

Ms. Elyse Greenspan, managing director at Wells Fargo, also said it wasn't just about pricing—reinsurers have made fundamental changes to their CAT offering. On the other hand, the casualty side is starting to lose margin, and RenaissanceRe CEO O'Donnell said his company is moving aggressively out of traditional casualty in favour of specialty lines.

S&P says that while its sector view on global reinsurance is negative, it believes the pricing and underwriting changes could bode well for reinsurers' profitability this year.

Higher interest rates

At the conference, the message from panelists was clear: The insurance industry remains well capitalized to withstand potential adverse market or economic developments.

Acrisure Holdings co-founder, chairman, and CEO Greg Williams said macroeconomic risks such as higher inflation are tailwinds for the countercyclical broker industry.

Meanwhile, higher interest rates will cause short-term pain for life insurers but long-term gain for those that survive, said Mr. Charles Lowrey, chairman and CEO of Prudential Financial.

Given industry regulation, panelists did not foresee any asset-liability mismatches such as those that contributed to the failure of Silicon Valley Bank. As banks pull back from lending following the first-quarter turmoil, CEO and CIO panelists see opportunities for life insurers.

Asked whether higher interest rates would cause the return of cashflow underwriting, Mr. John Marchioni, president and CEO of P&C writer Selective Insurance Group, said he isn't seeing any signs yet.

Cashflow underwriting was popular in the 1990s as an attempt to drum up more business by loosening underwriting standards and pricing products lower than needed to cover expected losses, with the expectation that these losses would be more than offset by investing the additional premiums to generate more investment income.

On the reinsurance side, Mr. Kevin O'Donnell, president and CEO of RenaissanceRe Holdings and Mr. Brian Young, president and CEO of Odyssey Group Holdings, said some companies will be pressured to do it. Mr. Young highlighted that IFRS 17, as a discounted cashflow reporting system, could incentivize cashflow underwriting in non-US markets, where such pressures tend to originate.


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