The President and Chief Executive Officer (CEO) of Bermuda-based reinsurer RenaissanceRe (RenRe), Kevin O’Donnell, expects the supply demand imbalance in property reinsurance to continue as concerns around climate change and elevated losses from natural disasters persist.
Speaking recently during the firm’s Q1 2023 earnings call, O’Donnell addressed the current reinsurance market landscape, highlighting rising demand and the constrained supply of capital.
He explained that, currently, the reinsurance sector is enjoying several advantages, including constrained supply as reinsurer appetite for volatility has diminished.
“This has been true for third-party capital for several years. It is also increasingly true for equity investors. As a result, we have yet to see a significant influx of traditional capital into reinsurance markets,” said O’Donnell.
“At the same time, reinsurance demand is increasing. Insurance companies are seeking strategies to reduce their volatility in order to stabilise their returns. Persistent inflation is also amplifying their losses.
“At its most fundamental, reinsurance is an efficient form of capital for insurance risk-taking, frequently the most efficient. Consequently, as the supply of risk capital diminishes, the competitive advantage of reinsurance increases,” he added.
O’Donnell said during the firm’s Q3 2022 earnings call that a step change in both the pricing & structuring of reinsurance is required, and as reinsurance market hardening accelerated at 1/1 2023 on the back of another above-average year for cat losses in 2022, as well as inflationary impacts, this appears to have come to fruition.
“This supply demand imbalance, as well as concerns over climate change and elevated cat losses, have resulted in a step change in property reinsurance risks,” said O’Donnell during today’s call. “We do not see these underlying dynamics reverting and consequently believe this step change will be reasonably persistent.”
Alongside the supply demand imbalance, O’Donnell noted the tightening of reinsurance terms and conditions, which reinsurers can leverage to manage the market cycle in ways insurers aren’t able to.
“As reinsurers we can offset underlying price reductions with lower ceding commissions. This helps to keep reinsurance of these lines attractive, relative to their underlying products. These advantages are significant and taken together make reinsurance relatively more attractive than insurance for the foreseeable future,” said the CEO.
Going forwards, O’Donnell expects the macroeconomic environment to be a “strong tailwind” to RenRe’s performance.
Yesterday, the reinsurer announced a strong performance across all segments, with a Property combined ratio of 56.6% and a Casualty and Specialty combined ratio of 92.9%.