We are at the end of the second day of our packed-out (Re)Connect agenda, and there is one word on everyone’s minds: capital.
Who is raising it, how much it will cost, and how best to use it.
Nearly every executive speaking on the line-up today referenced the importance of capital as a driver of current market conditions, as well as noting how using it effectively would give carriers a competitive edge in the future.
RenaissanceRe CEO Kevin O’Donnell, whose firm executed a $1bn raise in June to capitalise on the current market opportunity, said the cost of capital was the major driver for future rate momentum, not losses.
“We do not change rate based on losses, we change rate based on capital,” he continued. “We have an expectation that our capital is going to become more dear from an actual cost and an opportunity cost perspective.”
In his view, reinsurers of the future would have the “broadest palette” in bringing capital to bear on risk.
Key attributes will include “having third party capital, having the flexibility to understand complicated risks [and] being a good partner in understanding how to share risk”, O’Donnell said.
Everest Re CEO Juan Andrade struck a similar tone and said that capital alone would not equate to success for (re)insurance businesses in the future.
In this environment, with so much uncertainty from Covid-19 and prolonged low interest rates, clients care about sustainability and security, he said.
“That’s the challenge for the capital coming in – will it be there in a year, or two, or three? [The business case] has to be more than taking advantage of a firm market. It’s about relationships and it’s about sustainability.”
There is much market speculation around exactly how much capital will enter the market ready for 2021 – either via the anticipated “Class of 2020” start-ups or scale-ups of existing entities.
TigerRisk CEO Rod Fox estimated that as much as $10bn of fresh capital will be brought in for the current market opportunity.
The new capital was not just responding to a hardening property catastrophe market, but also “huge dislocations” in the US excess and surplus markets, Lloyd’s and legacy sectors due to the breadth of uncertainty over Covid-19, he said.
Today’s discussion not only centred around fresh capital raised, but also optimisation of existing capital.
In a legacy and liability management webinar today, panellists also agreed that optimal capital allocation would be top of the C-suite agenda in the current market environment – and that demand would rise for legacy solutions which would facilitate that capital release.
(And you can see the playback of that session and the rest of today’s agenda on demand here.)
Meanwhile, the third-party capital space may be laying low for the time being, but it is certainly here to stay.
There is a “pause” in the alternative capital markets right now, Everest Re’s Andrade said.
“I think there has been some investor frustration, after the cat losses in 2017, 2018 and 2019, and Covid has muddied the waters a little bit more,” he said.
“Capital is generally here to stay. It’s paused but it will come back.”
Meanwhile, Scor CEO Denis Kessler said ILS was a “nice tool” to have in a reinsurer’s arsenal, but it was not something that would replace traditional reinsurance.
“Three years ago, people were saying ILS was going to dominate reinsurance, crowd it out,” he said.
But due to trapped capital resulting from Covid-19 and recent catastrophes, capacity is actually less than it was before, he added.
“It seems that today there is a convergence in terms of pricing between reinsurance and ILS so therefore it means we are at a sort of equilibrium,” Kessler said.
“If what I say is true, it means that the development of ILS and reinsurance are likely to be proportional to one another.”