Arch Re: Leaning in, with a no-surprise policy
Many reinsurers talk about “leaning in” to the hard market, but Arch Re was one of the first ones to do so as the catastrophe segment became more distressed, picking up share in a notable way from the mid-2022 renewals onwards.
Now, as CEO Maamoun Rajeh says, the topic has become popularised on earnings calls. “[Leaning in is] aspirational, and everybody thinks that they're doing it.”
Clearly, this is not the case for all reinsurers – as otherwise the market would not have turned. Some having been quite public about paring back cat exposure – or, in the case of Axis Re, exiting outright – over the past year.
Even so, there is an element to which “the high tide raises all”, as Rajeh notes. You might expect this diffusion of gains would grate somewhat to a company that was early out of the gates, but he seems relaxed about it.
This attitude is perhaps reflective of a couple of points he raises. Firstly, the hope that cedants will remember and reward the reinsurers that were there when they needed them. Secondly, his optimism that the overall reinsurance sector is set for a phase of growth and prosperity after a challenging phase in which, for many hybrid carriers, reinsurance became a problem to manage.
What is the secret to having been able to truly lean into a rising cat market?
The reinsurance CEO identifies three key factors at work in laying the ground for Arch Re’s expansion (the firm’s top line is 5x that of five years ago).
“For me, it starts with a crystal-clear understanding of why you exist as a reinsurer… we recognise that we're in business solely to help our clients achieve their potential,” Rajeh says.
Next and key is the ability to recognise and manage the market cycle and having excess capital “so it's there and ready when it needs to be deployed”.
Why do those goals escape some carriers?
Rajeh blames the “heavily rearview-mirrored” navigating system on which reinsurers typically rely. “That sometimes traps people into a mindset and… strategies that are outdated and off cycle,” he says. "In our world, we spend a lot of time trying to be forward-minded… just trying to figure out where our clients really need us.”
Cut the games
With that in mind, Rajeh is keen to push the importance of the industry’s improving on delivering clear, forward-looking communications around renewal times.
He sees the mayhem that accompanied the 1 January 2023 renewal not solely as a byproduct of hard-market distress, but also from an “ineffective and irresponsible” belief that delaying indicative pricing until late in a renewal will provide tactical gains.
In contrast, he believes the mid-year 2023 renewal was orderly – but, crucially, not soft – because “the voice of underwriter was honoured… early”.
“All it takes is more dialogue,” he says, adding that the renewal outcomes should be like a performance review in that “there should be no surprises”.
“There’s no upside gain when we come in and have this game of chicken,” he continues.
“My hope for 1.1 is that we become a lot more transparent with one another – clients, brokers and underwriters. No one should be surprised. Let’s be locked and loaded well before 1.1.”
Step change in capital costs
Part of Rajeh’s rationale in calling for an end to these tactics is likely to stem from his confidence that the reinsurance segment is entering a different market phase, and one in which multiple underlying trends should support rates and yields in the coming years.
“It should be well understood that this is not an impulsive, quick payback on a specific loss type hard market,” he says. “This has been a build-up and a recognition of heightened costs of capital… a revision of the cost of volatility.
“Those components are things that are a step change in my mind. This is a broad-based recalibration of risk and volatility.”
The 2023 market has shown that the double-edged sword of capital convergence is that rates will react not just to insurer losses but to “anything that impacts capital”, he argues.
"There isn't a ton of capital flowing into the business. And that's not a hard thing to wrap your head around. It's just people have a lot of other things to do – other alternatives [to pursue].”
The Arch Re leader believes inflation and climate change are two of the fundamentally altered risks, in addition to capital costs, that will support rates and market growth.
Even setting aside innovation, Rajeh believes existing key reinsurance products are set to expand to meet new, albeit postponed, demand.
Property rate increases at the primary market “gives the fuel to our partners and our clients next year to really be able to purchase those limits that have been discussed and maybe hadn't pulled through”, he adds.
Inflationary pressure on valuation adjustments will also necessitate higher reinsurance purchasing and strain capital leverage, he predicts.
“There's just an accumulation of drivers here that will keep [rates] sustainable,” he says.
The complexity of these drivers – combined with what Rajeh sees as successively worse performance from each new class of reinsurers in the last mass-formation years of 1993, 2001, 2005 and 2020 – is one reason he believes new start-ups haven’t got away in 2023.
“This environment we're in right now requires, in my mind, a lot more expertise, a lot more technical knowledge, a lot more data, and that favours incumbents.”
Even without a new class of 2023, there remain multiple carriers with private-equity ownership that will be looking for a turnover in the near future.
Rajeh notes that, for many reinsurers right now, the organic track is delivering very positive top-line growth and momentum, while others have decided to acquire and add “stair step growth”.
Whether to “focus energies” on organic growth or on acquisitions is a decision “everyone has to make on their own”, Rajeh says.
However, he does see the move by some to jump onto the E&S bandwagon as a “moment in time” decision, which he believes fails to reflect the long-term benefit for hybrid carriers in having a reinsurance organisation.
As noted, Arch Re will enter this hard market as a larger and more meaningful competitor.
Will that, in turn, increase pressure to handle the next market downturn to safeguard excess capital, as it did heading into the 2022-23 phase? Will turning away clients or sizing back business be harder to achieve?
Despite his confidence around the current market drivers, Rajeh believes reinsurers will remain “an industry that's cursed by the cycle”.
And when prices do inevitably soften from this peak, Rajeh accepts that Arch Re’s larger “footprint and relevance” give it additional responsibility as it moves forward to “continue to be that market that adds value to our clients” and as a thought leader.
But Rajeh says a focus on consistency will get Arch through any cycle.
“In any cycle, we work really hard to solve problems,” he says. “No one likes to not win. We’re never less busy [in soft markets]… you're always grounded in your strategy and approach and values of the company.”