European reinsurers will miss their earnings targets in 2022 — for the sixth year in a row — which is pressuring the industry to raise rates and continue improving the quality of their portfolios, according to a research report published by Bank of America.

The result is that the industry is finally entering a “true ‘hard’ market,” said the report.

“In our view, reinsurers enter next year with significant bargaining power to push for higher prices and further restructuring,” said the report titled “Reinsurance & London Market Insurance — Six years of bad luck…or a problem? Pressures build into 2023 renewals.”

By “restructuring,” BofA was referring to dislocation in the property-catastrophe market, which had begun even before Hurricane Ian hit Florida. The report noted that Hurricane Ian is likely to blow through reinsurers’ Q3 and full-year large-loss budgets, which means the reinsurance industry “is now staring down six consecutive years of outsized large losses.”

A hard property-cat market will allow reinsurers to continue to restructure and improve portfolio quality over 2023, “given that efforts in the last two years have yet to deliver acceptable results,” BofA said, noting that reinsurers will continue “to evolve portfolios away from frequency and attritional losses that have weighed on performance.”

“An extremely difficult retrocession market (reinsurance for reinsurers) means underwriting discipline is a necessity for the industry. Pricing is important, but so are terms and conditions,” the report continued.

Demand vs. Supply

BofA predicted that the themes seen in 2022 will continue and accelerate into 2023—leading to supply-demand imbalances in the property-catastrophe market. Capital stresses already evident at June/July 2022 renewals will be further exacerbated by significant losses from Hurricane Ian, which BofA described as an earnings (and not capital) event for most of the companies it tracks.

While reinsurance demand will continue to grow in 2023, reinsurance capital levels will decline for the first time since 2018, according to the report. “As at H1 2022, total reinsurance capital had already fallen 11 percent YTD to around $640 billion, driven mainly by negative market moves on investment portfolios. Significant FX moves (strong USD) will likely also put pressure on available capacity in 2023.”

Beyond capital constraints, BofA said reinsurers will be under pressure from shareholders to improve portfolio quality. “After six years of disappointing performance, we think the industry needs to defend and prove the reliability of its attractive ‘underlying’ margins.”

Inflation, Large Losses

In addition to the pressure to improve portfolio quality, BofA expects inflation and large losses to dominate renewal discussions.

“Having likely underestimated short-term inflation for the last two years, we expect reinsurers to push for significant price increases to offset higher inflation assumptions,” said the report.