The fact that it is primarily private equity capital looking to replenish the reinsurance industry’s coffers is unlikely to dampen the effects of rate hardening in the near term, according to Luca Albertini, chief executive of Leadenhall Capital Partners LLP.
Speaking to Artemis during what would normally be the Rendez-Vous de Septembre in Monte Carlo – with initial reinsurance renewal discussions now taking place virtually – he said some of the broking community was doing its best to suggest that recapitalising would take some of the momentum out of the hardening market.
But he thinks differently.
“You have investors wanting to come in who will benefit from all the rate increases,” he said. “What we’ve seen has been quite healthy and has brought the market back to where it was when we initially launched our funds.”
“I’m hearing some brokers saying all this new fresh capital coming in is going to temper the rate increases,” he added.
“Clearly fresh capital will make its way into reinsurance programmes and the brokers are trying to make the most out of this to reduce the rate increases. But the kind of capital I understand is coming in, which is more private equity backed, is capital which requires a certain return. So it would be short sighted to say that we’ll go back to rate softening after a period like this.”
Albertini believes there will be a further firming up of rates and, as a result of that market correction, we will see a Class of 2020 reinsurance start-ups being set up in jurisdictions such as Bermuda.
“This is a bit of a chicken and egg,” he added. “Capital will eventually need to come in but it will come in when there are some assurances that the rate environment will remain firm.”
The impact of trapped collateral on retrocession capacity will be a big determinant of how much further rates increase at 1 January 2021, thought Albertini. “The availability of retro is effectively reinsurance capital and so that will have an impact on pricing.”
While uncertainty remains surrounding the ultimate impact of COVID-19 on the re/insurance industry, he is largely positive that the sidepockets created to reserve for such losses will not be wiped out.
While it does mean that investors once again have some of their collateral tied up at year-end, he thinks the ILS sector has done a good job of explaining the necessity of this.
Ultimately, it will all come down to how wordings on the original policies are interpreted in court.
“If you’re looking at retro I would particularly focus on New York law,” he said. “There’s so much uncertainty on the wording but at this stage it’s very healthy to have seen six to one rulings in favour of the insurance companies. But we just don’t know.”
Given the issues with loss creep after recent natural catastrophes, such as Hurricane Irma and Typhoon Jebi, COVID could actually prove to reassure investors that loss estimates do not always fall short.
Standard & Poor’s says the pandemic has so far cost reinsurers $12 billion, while Lloyd’s has projected a total insurance industry claims of $107 billion.
“From an ILS investor’s standpoint there has been a perception that every time there is a loss after the early event estimates of the first few months the numbers can only keep on going up, but then with the wildfires in 2018 and other events where the loss figures have gone down from the original estimate, it shows there is not always loss creep.
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