<p><strong>Speaker 0</strong>: <span>the reinsurers and primary insurers are back from their annual jamboree in Monte Carlo. So what was the mood music like? What might it mean for contract renewals and the price of insurance in 2024? Well, to discuss that, I'm joined now by Abbi Hussein. He is equity research analyst at El Gordon Abbott. Thanks so much for joining us. Uh, in a nutshell, when it comes to contract negotiations between the reinsurers and insurers at the moment, to which side of the fence would you rather be on?</span></p> <p><strong>Speaker 1</strong>: <span>That's a good question. So I would say the mood music turned really last year in favour of the reinsurers. And the big question out there, which you've just postulated is is how long is that going to continue in favour of the reinsurers and the mood music suggests? Actually, it will continue to be in the favour of the reinsurers for the upcoming contract renewal on the first of January. And my view is, actually, it's gonna be in that favour for a number of years.</span></p> <p><strong>Speaker 1</strong>: <span>Why is that? So there's a number of reasons. Um, so the obvious reasons are climate change, uh, inflation. So let's take the the first one of those The climate change, for example. That's led to increased frequency and severity of natural catastrophes around the world. So, for example, hurricanes, uh, wildfires, uh, floods</span></p> <p><strong>Speaker 1</strong>: <span>and the insurers then have to pick up the costs. So the insured losses have amounted to hundreds of billions in the last five years. So each year for the last 5 to 6 years, the costs have tallied up 100 billion or so, uh, for each of those 5 to 6 years,</span></p> <p><strong>Speaker 1</strong>: <span>Um, and that average cost over the last five years is almost double what we've seen in the previous 20 to 30 year period. So there's been a massive ratchet ratchet up in, uh, in the costs of the industry is seeing. And so that's led to a number of reinsurers were just frankly decided. We can't price this risk and just exiting the market. So the supply side of, uh, the market has shrunk,</span></p> <p><strong>Speaker 1</strong>: <span>and those capital providers that provide the capital to the reinsurers or to this market have also suffered losses and have decided Well, actually, you know, we're not earning the returns that we had hoped for.</span></p> <p><strong>Speaker 1</strong>: <span>And so the capital hasn't replenished at the same rate you may have would have expected. But does that</span></p> <p><strong>Speaker 0</strong>: <span>then have a knock on effect on other parts of the insurance market? Do do Or does it just mean it's gonna be a tough time if you want to get cover for for climate change?</span></p> <p><strong>Speaker 1</strong>: <span>So I think the answer is both. It's gonna be a tough time if you want to get cover for these disasters. But</span></p> <p><strong>Speaker 1</strong>: <span>But at at the end of the day, you need to buy cover for these two things are gonna happen. So as a primary insurer, you're gonna face higher costs. Or if you're if you can't absorb those higher costs, you're gonna be looking at other ways in terms of managing, uh, the cover. And that might be that you buy less cover. So you might be taking a higher emission loss. So you might take a higher amount of the first part of the lost before the reinsurer steps in</span></p> <p><strong>Speaker 1</strong>: <span>and we're seeing limits or attachment points of these contracts increase, and we're seeing the prices of those contracts increase. And it may well be that the end customer, the end, uh, client so the owner. The owner of this building, um, may end up paying more for his cost of cover to the primary insurer. The prime insurer is paying more to the insurer, so there is a knock on effect here.</span></p> <p><strong>Speaker 0</strong>: <span>And you mentioned inflation was the other big big topic.</span></p> <p><strong>Speaker 1</strong>: <span>Yeah. So</span></p> <p><strong>Speaker 1</strong>: <span>I mentioned hurricanes and floods. And after those devastating disasters, we have to pick up and, uh, repair the buildings, repair the roads, repair the infrastructure, and there's a cost to that. And the cost has increased be just just because of inflation. Um, so supply chains haven't quite got back to normal Post pandemic. So the time to repair has elongated,</span></p> <p><strong>Speaker 1</strong>: <span>um, the costs have risen. Um, and so therefore, that needs to be picked up somewhere. And that is has to be reflected in the price as well.</span></p> <p><strong>Speaker 0</strong>: <span>And in the round, is there more capital coming into the reinsurance market at the moment or less.</span></p> <p><strong>Speaker 1</strong>: <span>So there is more capital coming in. Um, but not to the extent that, um that is required. So we estimate that around $100 billion of additional capital needs to come into the market to meet the demand for coverage. And the demand for coverage has increased for the very reasons why the capital has shrunk because of the increased frequency of of storms because of climate change. Um, so far this year, the estimates are that,</span></p> <p><strong>Speaker 1</strong>: <span>uh so far over the last 12 months, the estimates are only about 5 to 10 billion. Let's say $10 billion of capital has come into the market, and that's a big shortfall versus the 100 billion that needs to come in.</span></p> <p><strong>Speaker 0</strong>: <span>So who's normally the provider of these five or 10 billions? And do they just not have as much money now? Are they looking to get a return on that money by investing</span></p> <p><strong>Speaker 1</strong>: <span>somewhere else? So So this is a great question. So the providers vary from, uh, your traditional big reinsurers, uh, to your hedge funds, uh, to your pension funds. And the pension funds and hedge funds have come in in the form of what we call alternative capital.</span></p> <p><strong>Speaker 1</strong>: <span>And what's happening is that alternative capital hasn't replenished to the same extent as as we would we would have hoped, because they've suffered those losses recently. But also something else has happened. Interest rates have risen recently so bond yields are higher. Um, and so those pension funds can now make an easier return. But just through the traditional fixed income, um, asset markets just buying corporate bonds, for example</span></p> <p><strong>Speaker 1</strong>: <span>they're not having to hunt for yield as we had as they had to in in the low bond yield environment. And so the hurdle rate of money coming into the reinsurance market has increased. Um, and so, um, you're not seeing capital flowing back to at the same pace as we had in the past and to correct that. But what do you need? Well, the market needs to demonstrate the reinsurance market needs to demonstrate</span></p> <p><strong>Speaker 1</strong>: <span>it can generate higher ROES than it has in the past. Well, how is that going to happen? Well, you need to push up your pricing, or you need to adjust your contract terms to earn a better ROE. And if you can demonstrate that consistently, then you will attract capital into the market.</span></p> <p><strong>Speaker 0</strong>: <span>We've talked about the market in general, and we've had a a bit of a look at what's going on in if I call it climate risk. But are there any risks out there where actually as a reinsurer, You said this is getting an easier market. I can offer better terms for 2024 than than I've been able to in the past. So</span></p> <p><strong>Speaker 1</strong>: <span>So look, the the the is always nuanced. Uh, if I look at it in aggregate directly, they need to push up pricing and the contract terms need to be tighter.</span></p> <p><strong>Speaker 1</strong>: <span>But there are markets where the pricing is coming off. Um, the contract terms can be relaxed. So, for example, the directors and officers, uh, insurance that that product, the pricing is coming off. That's probably gone slightly too far. But that doesn't mean to say the reinsurers cannot make money. Um, the pricing is still adequate, but it doesn't need to keep.</span></p> <p><strong>Speaker 1</strong>: <span>It doesn't need to adjust upwards as it does, for example, in the catastrophe lines or property catastrophe lines where we're seeing 2030 50% price increases in the directors and officers, uh, product line you're seeing probably 5 10% fall in pricing.</span></p> <p><strong>Speaker 0</strong>: <span>Final question. You were saying a little earlier. The market needs $100 billion of capital, and it's got, let's say, 10 has turned up the sake of argument. How long is that supply demand likely to last</span></p> <p><strong>Speaker 1</strong>: <span>so simplistically. If at that current run rate, if we only gonna see 10 billion of capital coming into the market annually, it's gonna take another nine years at the current run rate.</span></p> <p><strong>Speaker 1</strong>: <span>Um, for the market to correct itself, for for it to reach the equilibrium that it needs to. So that means the reinsurers are gonna see those favourable conditions for a number of years. Now, will it really last nine years or so from this point onwards? Probably not. I suspect the pace of cattle coming in is going to pick up. As the reinsurers demonstrate</span></p> <p><strong>Speaker 1</strong>: <span>20% RES. 25% RE consistently. And if you see that, then I suspect the pace of capital coming in is gonna double. Um, and so I, I would guess</span></p> <p><strong>Speaker 1</strong>: <span>2 to 5 years, um, we will see these variable conditions last for for the reinsurers.</span></p> <p><strong>Speaker 0</strong>: <span>But what if someone said to you, That's all very well, Abbott. But that, uh, the amount of insurance that's needed will go up as well. You yourself said, uh so So if you put a sort of compounding figure on the rising demand for insurance. How much longer would that take for the two to</span></p> <p><strong>Speaker 1</strong>: <span>meet? So that's right. So I have assumed the demand for coverage is gonna stay static. And that's not it's gonna increase because of climate change because of inflation.</span></p> <p><strong>Speaker 1</strong>: <span>So, look, this is a crystal ball kind of question. And it may well be that this cycle lasts 10 years. The previous cycle, Um, or some of you know, of pricing prices increasing, Uh, that we had, uh, probably did last for 5 to 7 years,</span></p> <p><strong>Speaker 1</strong>: <span>so I'm probably gonna go with that sort of time frame. Uh um, just because, you know, suddenly there's a snowball effect of when capital starts to come in in a meaningful way. It comes in in in a really meaningful way. So I would still probably say sort of 5 to 7 years. Realistically,</span></p> <p><strong>Speaker 0</strong>: <span>we have to live with That is saying thank you for joining us. Thank you.</span></p>