Gallagher Re’s Vickers: Reinsurers to face excess capital conundrum if growth objectives can’t be met

The Insurer spoke with Gallagher Re’s James Vickers to reflect on where renewal discussions sit at the end of Monte Carlo, and the likely implications for the reinsurance sector at 1.1 and beyond.

Reinsurance M&A could be a key trend to look out for in 2025 if reinsurers are unable to achieve the growth they are targeting organically, according to Gallagher Re’s international chairman James Vickers.

As the dust settles on this year’s Rendez-Vous in Monte Carlo and the industry prepares to ramp up renewal discussions, Vickers says the overlying theme in messaging from reinsurers during the event was that they are looking for more growth.

“They had excellent results in 2023 and were again very strong in the first half of 2024.

With a few exceptions, reinsurers are comfortable with pricing and terms and conditions, and they would like to have more of it,” Vickers explains.

In contrast, he says buyers have not only paid more during the last couple of years but have also seen changes to their terms and conditions, and particularly retentions.

“Buyers are not particularly happy. They look at the results reinsurers have reported, and their own results don't look anything like that. They've been on the receiving end and they think that this year they can get a better deal,” he says.

“Reinsurers have seen their capital grow through retained earnings. But they are nervous around what has happened in the past, and conscious that too much capital in the reinsurance space will push pricing down.”

Excess capital conundrum

This brings the question as to what happens if reinsurers cannot achieve their desired growth.

“Assuming there are no major loss events and reinsurers are not able to achieve the growth they desire, the conundrum is then what they do with the excess capital,” Vickers says.

“For quoted companies, the pressure to give some of that capital back will be fairly intense.

Some will also look at M&A as a way of maintaining growth.

“However, it should be remembered that the reinsurance industry does not have a great track record with M&A.

“But this will be a key trend to watch in 2025 if this year plays out as we hope it does in terms of major losses.

“As interest rates come down, the value of bonds goes up. As a result the economic value of reinsurance balance sheets will expand even more. Among the big four European reinsurers, solvency ratios are already well ahead of their target range” he continues.

Preferred clients

For now, Vickers says early renewal discussions have progressed as expected.

“To some extent, it played out the way we thought it would. There are some reinsurers holding a firm line. Some will be a bit more flexible and move closer towards the structures buyers would like to see,” he says.

“It will play out client by client and territory by territory. For preferred clients, I think reinsurers will show a bit more flexibility. Reinsurers will have established which companies they want to support and they want to grow. The overriding message is that they want to grow with good clients they already support.”

For property cat, he says uncertainty will remain until the outcome of the 2024 Atlantic hurricane season is known.

“All bets are off if something happens between now and the end of the year, but it would have to be fairly big to impact reinsurance rates,” he says.

US casualty – one of the major talking points at this year’s Rendez-Vous– looks set for a highly nuanced renewal amid major differences in loss trends between the strongest and weakest performers.

“Clients with a very good story will have a much easier renewal. The appetite to write US casualty varies a lot by reinsurer,” Vickers says.

“Our plea to reinsurers is please look at each submission we put in and look at the technical detail behind it rather than take a broad-brush view.

“It's not that reinsurers don't want to write US casualty, they just need to be convinced the business they put on their books has a chance of earning a reasonable profit over time.”