Third-party capital’s influence on reinsurance rates not over yet: KBW

by Artemis on April 17, 2014

The influence third-party capital is exerting on reinsurance sector pricing, particularly property catastrophe reinsurance, is not over yet, according to the latest sector report from Keefe, Bruyette & Woods analysts.

The research report which is a preview to the insurer and reinsurer first-quarter results season, tilted ‘Bad Weather, Low Yields, Softer Pricing – What Could Go Wrong?’, looks at the factors which have been affecting re/insurer results, namely below average weather and catastrophe losses, low investment yields and of course softening of reinsurance pricing and the influence of alternative or third-party capital.

The KBW analysts, led by Meyer Shields, expect most re/insurers will report solid first-quarter 2014 results with a bit of a dent to some insurers hit hardest by the harsh winter weather around the world. Reinsurers are expected to escape relatively unscathed from the winter weather as losses remain below average levels.

Significant declines in reinsurance pricing and a slowdown in commercial insurance rate increases are the key issues affecting re/insurance market dynamics right now. While results reported for Q1 are expected to be solid by KBW the outlook has deteriorated, with expectations that a floor for property catastrophe reinsurance pricing will be found any time soon fading.

The markets hope that January renewal property catastrophe reinsurance price declines were simply a sign of rates catching up with last June has been proven to be challenged. This was evident in recent April reinsurance renewals, which also saw prices tumble across many catastrophe reinsurance regions of the world and the expectation now is for further reinsurance softening in June.

KBW expects ‘compounding double-digit’ price declines at the June and July reinsurance renewals, according to the report. The analysts cite the recent Willis Capital Markets & Advisory (WCMA) report which said that catastrophe bond risk premiums continue to decline reflecting a still increasing supply of capital.

The KBW analysts note that some of the continuing price decline may still be the effect of ‘flushing out’ price hardening from quarters before mid-2013, but with WCMA suggesting that investors still have pent-up meaningful demand for cat bonds it suggests to the analysts that, “There is still a ways to go for third-party capital’s influence on reinsurance pricing.”

Third-party investors continue to access reinsurance as a new and diversifying source of yield, however KBW says that the available supply is clearly limited meaning that an increasing number of hybrid reinsurers, and we would add ILS managers, are looking to allocate capital towards specialty commercial lines of business, which inevitably is having some effect on pricing there as well.

The price declines in property catastrophe risks which we’re likely to see in June could be anywhere between 10% and 20%, many are suggesting. Recent catastrophe bond transactions would suggest somewhere in the middle of that range is likely.

As we move forward through the rest of this year, it will be interesting to see whether the reduction in reinsurers underwriting returns, as they compete ever more strongly on pricing and relax terms, combined with continued low investment returns in the current economic environment, begin to take their toll.

If the 2014 Hurricane Season sees no exceptional losses to the insurance industry and the rest of the world remains reasonably loss free or sees average losses, then property catastrophe reinsurers may find their expectations for a pricing floor begin to seem ever further away.

While catastrophe insured losses remain below average the reinsurance industry may find its results remain acceptable to investors and the markets. However a few quarters down the road, once compounded price softening begins to show more clearly in the results and if we see a quarter with higher catastrophe losses, then the results season should become a lot more interesting.

Read more of our coverage of recent reinsurance renewals here.

Also read:

The capitalisation of the reinsurance business is changing.

Alternative reinsurance capital grew 28% to $50 billion in 2013: Aon Benfield.

Alternative reinsurance capital to grow to $100 billion: BarCap.

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