According to a bullish forecast from Goldman Sachs analysts, reinsurance rates and pricing may rise faster than primary insurance rates and pricing through 2022 and 2023.
Goldman Sachs analysts, in initiating analyst coverage of the big four European reinsurance firms, imply that the reinsurance market has room to catch up further to the stage of the cycle that primary lines of business have attained.
As a result, the reinsurance sector is expected to face tailwinds rather than headwinds, both from the pricing cycle and from the expectation that demand will rise.
Analysts anticipate that climate change will play a significant role in increasing reinsurance market demand.
On the pricing front, inflation, social inflation, loss trends, and near-term weather risks are all expected to keep reinsurance rates rising.
Recent catastrophe and weather loss trends, which many believe represent a new normal, are among the industry concerns that should drive longer-term price increases in reinsurance.
This fear of a new normal in loss activity has resulted in a level of risk aversion not seen in well over a decade, and as a result, reinsurance rates have been rising more consistently than seen in a comparable length of time.
“The reinsurance cycle has lagged the primary insurance cycle, but is beginning to catch up,” Goldman Sachs analyst team wrote. “In our view, the combination of higher underlying general inflation and the impact of climate change will drive a further hardening of the market through 2022 to 2024.”
Analysts believe that “we are in the hardest part of the cycle” right now, as the market seeks to recover its recent losses, and that much improved returns are expected.
We’ve said time and time again that the industry needs to reset the pricing baseline, so raise the floor to a new level that supports sustainable profits.
That price floor in reinsurance must also be evaluated on a regular basis to ensure that it is adequate and supportive of the tiered market dynamic of primary, reinsurance, and retrocession.
Because primary pricing has outpaced reinsurance, analysts believe the time has come for rates to catch up.
“We believe the reinsurance cycle could catch up with the primary cycle through 2022 and 2023 given the concern and expectation that the experience of the past five years could be the new normal of higher weather losses due to climate change,” Goldman’s analyst team explained.
In terms of rate adequacy, it is this risk aversion issue, rather than capital, that provides more confidence that a new floor is being installed.
At the same time, retrocession remains capital constrained, which analysts believe supports ongoing reinsurance price increases.
There are a lot of unknowns right now, with analysts seeing inflation as a dynamic that could prolong the current hard market and raise reinsurance pricing even more.
“The combination of inflation and climate change will be at the forefront of insurers’ minds as they approach 2022 renewals,” Goldman Sachs analysts predict.
Goldman Sachs’ outlook is particularly upbeat, which bodes well for insurance-linked securities (ILS) strategies, particularly those focused on providing collateralized reinsurance or investing in instruments such as catastrophe bonds.