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After 1.1

The broad shape of the 1 January renewals is now clear. And although there is a bull case to be made around casualty and an uptick in elements of primary pricing, the outcome is broadly disappointing for a reinsurance market still disproportionately reliant on property to make money.

The relatively small increase in property rates adds further ballast to the argument, long in circulation, that the involvement of pension fund money in the sector is a cycle killer.

The speed of the ILS market reload strengthens that thesis materially, although it is certainly worth noting as a corrective that with the broader reinsurance market not heavily impaired this may not be the true test of whether the cycle has been decimated by third-party money.

If you do accept, though, that broad post-loss pricing corrections in property will never be seen again, what are the implications for reinsurers and what should they do?

It seems clear that the model needs to continue to evolve to future-proof businesses and deliver attractive returns for investors.

There seem to be four major levers that reinsurers can pull - with a number of them mutually supportive of one another.

The first is diversification. If reinsurers see themselves as risk businesses, there is no reason that they cannot play across a range of different risk - including P&C insurance and reinsurance, retro, mortgage, legacy and even life. They could also ensure diversification within geographies and lines within the reinsurance sector.

This move would not only diversify their earnings stream - and offer them access to potentially higher return areas like mortgage and legacy - but allow them to improve their capital efficiency. It could also produce economies of scale.

Secondly, they could look to become originators and managers of risk, as well as in some cases services businesses.

Reinsurers have already started along this path, but there is still scope to evolve towards a model in which capital is a complex patchwork of equity, debt, reinsurance and third-party capital from investors with a range of different risk appetites.

This would allow carriers to build their franchises, boost their ROEs through repeatable fee income and manage the cycle (what is left of it) by scaling up and down their net bets.

The third lever is expense management. Here, reinsurers are likely to look primarily to technology as a means of bringing down operating expenses, with straight headcount reduction creating the danger of deteriorating underwriting performance and weaker broker relationships.

Some reinsurers may also attempt to achieve expense reductions via synergies-driven M&A - something which could also offer capital synergies by accelerating diversification.

Fourthly, reinsurers could work their investments harder. If taking risk on the liability side of your balance sheet is no longer as attractive in the long term, then they could try to dial up asset risk.

With asset leverage built into their models, reinsurers have latent returns that they are arguably not accessing due to risk aversion or the absence of the requisite asset management skills.

Some may have suggested that the total return model is discredited, but Berkshire Hathaway and Hamilton Insurance Group show that is far from the case.

If major post-loss pricing corrections in property cat reinsurance are a thing of the past, that will make life harder for reinsurers.

Nevertheless, the need for financial markets to (re)insure risk remains and there is still scope for reinsurers to flourish in this environment.

They will just need to work harder and smarter in order to do that.


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