Reinsurers show steadfast discipline and modest adjustments: RBC Capital Markets
RBC Capital Markets, the investment banking arm of Royal Bank of Canada, provides a comprehensive analysis of the Monte Carlo RVS 2024, highlighting that reinsurers are steadfastly maintaining their position in renewal negotiations.
Following a period of underperformance leading up to 2023, reinsurers are working to rebuild their earnings.
Despite a challenging claims environment, RBC Capital Markets anticipates that significant improvements in prices and terms across the board are unlikely.
Instead, reinsurers are expected to implement more modest adjustments, both positive and negative, which should help sustain market conditions at current levels through 2025.
RBC Capital Markets projects that reinsurers will secure returns on equity (ROEs) in the mid-to-high teens and observes a growing recognition among investors of the reinsurers’ efforts.
RBC Capital Markets notes that in the current market equilibrium, industry leaders are maintaining underwriting discipline amid ongoing uncertainty about risk trends.
Smaller market participants appear to be following this lead. Although primary insurers are highlighting the strong ROEs of reinsurers since 2023, this resistance is moderated when considering the longer-term average ROEs, which were in the mid-single digits over the six years from 2017 to 2022.
The market is characterised by reinsurers’ (both traditional and alternative capital) willingness to meet demand only if return targets are met, with ample capital available.
RBC Capital Markets also points out that risk differentiation remains evident across various classes. There is a clear preference for property and specialty risks over casualty risks.
In casualty renewals, reinsurers are taking a firmer stance in the absence of significant improvements this year. While property catastrophe rates might soften slightly from their strong levels, retention levels are expected to stay steady, seen as a concession to primary insurers in light of underlying inflation.
Reinsurers show little appetite for lower layers, such as non-peak perils. Specialty risks are generally attractively priced, though there is increased scrutiny on cyber and SRCC (strikes, riots, and civil commotion) risks.
Looking ahead, RBC Capital Markets forecasts that the rebalancing of economics between primary insurers and reinsurers will be more moderate compared to the significant reset of 2023.
The experience of the remaining catastrophe season will act as a catalyst, but RBC Capital Markets expects industry discipline to play a more significant role. Over the long term, there is potential for shallower market cycles.
Due to challenges in obtaining affordable reinsurance coverage for lower property layers and US casualty, RBC Capital Markets anticipates that primary insurers will adjust their underwriting strategies.
This adjustment could benefit reinsurers through increased reinsurance budgets, quota-share arrangements, and direct participation in primary operations.
RBC Capital Markets does not foresee major downside surprises, but should 2025 renewals be slightly softer than expected, reinsurers’ earnings outlook is expected to remain secure with ROEs in the mid-to-high teens through 2026.
A proactive approach to managing earnings, including reserve buffer build-ups, will provide reinsurers with better downside protection, and improvements in non-P&C segments will enhance overall earnings resilience.
Reinsurers’ multi-year ROE targets in the mid-teens reflect their confidence in achieving these goals. Despite the challenge posed by the normalisation of interest rates, RBC Capital Markets believes this will likely reinforce underwriting discipline.
They conclude that while exercising discipline may limit growth opportunities, particularly in areas of differing viewpoints, larger reinsurers can leverage their scale to offer comprehensive underwriting across multiple lines for leading primary insurers.
This strategy helps to strengthen key relationships and secure long-term growth, particularly as the market cycle eventually softens. Unless there is an extreme loss event, the potential for attractive capital returns at fiscal year-end is expected to remain stable, given the current capital levels, strong earnings prospects, and limited growth avenues.
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