The current reinsurance market is sustainable, and it is a good time for reinsurers to deploy capacity, as cedents are hungry for it, Howden Re’s David Flandro highlighted in an interview with Reinsurance News during RVS 2025 in Monte Carlo.
“What got us to the unsustainable market of the teens was actually multi-factor. The first factor that got us down to that spot, say 2016 or 2017 when rates troughed, was the relative dearth of insured catastrophe losses. Hurricane Wilma hit in 2005, Hurricane Irma is in 2017. So in Florida, there’s this 11-year period of relatively low cats,” Flandro explains.
He continues: “But the second and possibly more important factor was that we had negative interest rates. And we had about $70 billion of ILS inflows. When you have the combination of those two things, negative interest rates, what does that do? It inflates traditional capital. $70 billion of ILS flows makes dedicated capital higher.
“We had loads of capital in the mid-teens, and every year the only question was is it down five or is it down 10? This was named Groundhog Day, and it really troughed in the teens.”
Now the industry has come over this pricing peak, and after this experience people remain cautious.
Flandro expects rates to continue to drift the way that they’ve been drifting for the last two or three renewals, this if the industry has a normal cat loss year, capital levels stay stable, and if there are no major world events, like a war.
The executive stated: “If you’re a reinsurer or you’re a cedent, you want to know if rates are going to get all the way back down to where they were in 2016 and 17. But nobody can predict the future.
“If I had to bet, I would say we are in an environment now of higher Global Risk Premia. It means that we are reordering the global trading system. We have two hot wars, we have yields on 30-year securities that are getting close to six percent, we have yields on medium duration, and high grade fixed income securities that are also elevated.”
When this happens, traditional capital becomes more dependent on retained earnings, as it can only go so high, the executive explained. “It also means that the hurdle returns for ILS, if you’re issuing an ILS, in a market with zero interest rates, you have a much lower hurdle,” he said.
“If you’re issuing an ILS at a market with 5% or 7% interest rates, you have a higher hurdle, and reinsurance pricing is also related to that hurdle. So, in my view, there will be a floor, because we are in an environment of higher hurdle returns, higher interest rates, and higher inflation – at least for the moment. That doesn’t mean that rates are suddenly going to spike up, it just means that the market is a little more tenuous than it was ten years ago when we had an environment of negative interest rates.”
According to Flandro, another reason for the sustainability of the market is that reinsurers have had an extremely profitable three years, even with the impact of California’s wildfires.
He explained: “That’s because in a normal year insurers typically retain about 54% of all unlevelled modelled nat cat exposure. It’s usually 54% retained by the cedants, 46% assumed by the reinsurers. At 1.1 2023 and in fact throughout 2024 on average cedants retained 67% of all modelled risk, reinsurers assumed 33%. That’s really high for cedents.
“In 2023 and 2024 underwriting years, almost all of the losses were paid by cedents in the nat cat market, which is quite extraordinary. This also coincides with this massive economic value creation for reinsurers. We’ve just had two or three years of hardening or hard market softening market conditions. And now we are in this hard market softening phase where we’re past the pricing peak. That doesn’t mean there’s not a lot of profitability left in the market and not just ROE, but economic value creation, share price appreciation, the investor return.”
Flandro concluded: “I think we are in a very sustainable market. And if you’re a reinsurer, now is still the time to deploy capacity, cedents really value that capacity, and they’re really hungry for it after the two years they’ve just been through.”
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