David Flandro on reinsurance pricing, capital and building optionality with AM Best

“The cost of reinsurance is zigging, as it were, and the cost of all the other forms of capital is zagging.”

David Flandro, Head of Industry Analysis and Strategic Advisory at Howden Re, joined Waleed Jabsheh, President and CEO of International General Insurance, and Greg Carter, Managing Director at AM Best, for an AM Best TV roundtable at the Rendez-Vous de Septembre in Monte Carlo.

The panel discussed an unusual point in the reinsurance cycle: rates are falling while geopolitical uncertainty, inflation, interest rates and wider risk premia remain elevated.

For David, that divergence is giving cedents reason to think differently about the role reinsurance can play on their balance sheets.

Reinsurance is moving against other forms of capital

Global risk-adjusted property-catastrophe reinsurance rates have been falling since their 2023 peak, with the decline accelerating at mid-year.

At the same time, David pointed to rising country and equity risk premia, alongside elevated inflation and interest rates.

“The point is that the cost of reinsurance is zigging, as it were, and the cost of all the other forms of capital is zagging.”

As those forms of capital compete on balance sheets, the changing economics are prompting buyers to reconsider their options.

“Buyers right now are going, wait, is there an arbitrage here? Maybe there is, maybe there isn't.”

Now is the time to build optionality

The wider risk environment makes that question particularly relevant.

Reinsurance pricing has moved considerably from the hard conditions of 2023, but geopolitical and macroeconomic uncertainty remains high. History also shows that the direction of the cycle can change quickly when several events converge.

For David, that makes the ability to prepare for different outcomes increasingly valuable.

“Now is the time to build in real optionality if you're a cedent. Now is the time to change what you've got in the toolbox to diversify.”

Rather than trying to predict what turns the market, cedents can consider the protection they may want if conditions change.

“It pays to have a contingent strategy, a break the glass strategy. That's what we've been hearing a lot here at Monte Carlo.”

What could change the market?

The panel also explored what could bring the current softening cycle to an end.

Howden Re's risk scenario generator tests variables including dedicated capital, reserve strengthening, interest rates and natural catastrophe losses.

One scenario combines a US$200 billion insured natural catastrophe loss year, net reserve strengthening in at least one major class and a further 100 basis point move in interest rates. Together, those factors would change the model's pricing signal from negative to positive.

But the specific scenario isn't the prediction.

“The answer is there's a whole bunch of stuff that theoretically could change the market. We don't know what it would be.”

That uncertainty is precisely why optionality matters.

Watch the full AM Best TV roundtable to hear more from David, Waleed and Greg discuss geopolitical risk, the reinsurance cycle, capital deployment and what could change the direction of the market.

Watch the full discussion: https://www.ambest.com/video/video.aspx?s=1&rc=rvsuncertaintypanel926