Where does the market go from here? – interview with Howden Tiger’s David Flandro

When Howden Tiger published its appraisal of the January 2024 reinsurance renewal, it characterised the market as “a new world”, in which supply and demand are in a temporary equilibrium.

That can make the market seem remarkably simple – just a matter of classic supply and demand dynamics – but there are so many moving parts, simultaneously in flux, emphasises David Flandro (pictured), head of industry analysis and strategic advisory, Howden Tiger, speaking with GR.

The latest renewals paper was really the second of two parts, following what the reinsurance broker called “the great realignment”, at the previous 1/1, one year earlier.

“We’re in a new world that was realigned last year. It’s really quite extraordinary what we’re living through,” Flandro says.

This year, risk-adjusted property catastrophe risk rates were up just 3%, essentially flat, contrasting with the rambunctious renewal of 1/1 2023, when the intermediary estimated a 37% rate hike, by the same metrics.

Flandro points to dedicated reinsurance capital, calculated using a conservative methodology, which tracks capital actively supporting risk.

“At the end of 2022, we had this giant drop in dedicated reinsurance capital. Some think this was driven by Hurricane Ian, but most of it was a drop in traditional capital that happened with a dramatic rise in interest rates in the middle of that year,” he says.

“In 2023, as interest rates have moderated and retained earnings have come through, traditional capital has recovered. But we’ve also got almost $20bn of new capital flowing in post-Ian from net new ILS issuance, from collateralised vehicles, side cars, etc.,” Flandro continues.

Despite this, there has, so far, been a conspicuous lack of reinsurance startups. However, capital inflow in 2023, is relatively small compared to that seen after 9/11 or Hurricane Katrina, Flandro noted, which is when previous generations of Bermuda reinsurers in particular set up shop.

“That capital is still flowing into the market…supply-demand dynamics in the market were very finely balanced at 1 January,” he says.

While discussions around renewals often focus on property-catastrophe business, he notes the same basic dynamic applies to other key business, such as risk-adjusted prices for direct and facultative, seen to be flat, and non-marine retro, which Howden Tiger reported as “flat at 1/1 but moderating slightly in higher upper layers”.

“In this environment, pricing is rising, premiums are rising, but capital is also rising, and it’s all happening concurrently,” Flandro says.

Orderly is the word

This sense of balance contributed to the stability and orderliness that many brokers and underwriters have been happy to report after 1/1, contrasting with the highly constrained capital and strained relationships have reported at the previous renewal.

“The term you heard the most at this 1/1 renewal was ‘orderly’. It was orderly; everyone is trying to understand where the market goes from here. At this point it really is a function of capital supply,” he says.

Assuming other market factors stay relatively consistent, more capital is on the way, Flandro emphasises, as 2024 continues to unfold.

“This is a continuum, the capital entry, it’s not a snapshot,” he says. “We think more capital will come in, and that, ceteris paribus, 2024 is going to portend a different tone in negotiations than 2022 and 2023.”

He looks towards upcoming renewals, starting with April 1, although this will be a different dynamic, being predominantly focused on Japanese earthquake excess of loss business, which has been subject to losses from the Noto Earthquake, which occurred on 1 January.

“Although 1/4 will be important, the cleaner bellwethers will be 1/6 and 1/7, particularly given the volume of business renewing by then,” he says.

In property cat, reinsurers assumed a lower proportion of exposures at the 1/1 renewal in 2023. From assuming an average 46% of annual property cat losses between 2000 and 2022, this fell to 36% in 2023, Flandro notes.

“The question going in to one 1/1 2024 wasn’t ‘are cedents going to get that back?’, but rather ‘will those terms and conditions be maintained?’, and they were by and large, with some exceptions,” he says.

Financial lines

Casualty market reinsurance buying was a major talking point at Monte Carlo in September 2023 as the traditional starting gun to renewals conversations, particularly claims for US directors’ and officers’ liability (D&O) business, which already shot up from 2018-2020.

However, Flandro notes that primary market premium also doubled over the same period to keep pace with claims activity.

Financial lines casualty reinsurers concerns focused on the logic that “bad years get worse” for this longer-tail business, based on deterioration in prior-year reserves, inflationary and social inflationary effects, primarily from compensation values assigned by US courts, as well as a Covid backlog of unheard court cases from 2020 onwards, adding further uncertainty.

“Some ceding commissions were given back on casualty business at 1/1 2024, benefiting reinsurers, but the double-digit rate increases discussed at Monte Carlo didn’t materialise,” Flandro says.

“If you look across all long-tail accident years, including casualty lines, while it’s true that recent accident years in some business lines remain unsettled, others appear quite mature. We have seen years of reserving redundancy in lines such as workers’ compensation, products liability and non-proportional liability, which is closely tied to London market casualty excess-of-loss performance,” he adds.

Higher RoEs

A rising tide lifts all ships. The return of higher interest rates, after more than a decade of anemic investment returns, bodes well for reinsurers, and the insurance industry in general. Return on equity (RoE) figures posted in recent years were handicapped by what reinsurers’ conservative asset portfolios could achieve in such conditions.

Flandro emphasises that the outlook is now much brighter for reinsurers investing the higher premiums they have already achieved for two 1/1 renewals in succession.

“Right now, if you have a normal year, with a 90% combined ratio, you can make a 20% RoE if you’ve got a 4-6% investment return,” he says. “That has completely changed the calculus, even though most underwriters haven’t started incorporating this – and maybe that’s a healthy thing – the investors are counting on the yield increasing on that float.”

Underwriters have historically fallen into the trap of underwriting for cashflow, which contributed to the 1990s liability crisis, but there are no indications of this risk yet, he suggests.

“The right way to do it is to continue to underwrite for a profit where you can get it and then you’ve got this higher investment yield that enhances your return, and that’s the world we’re back in now,” Flandro says.