January renewal rate declines may be better than expected: KBW

by Artemis on December 23, 2015

With reinsurance market pressures set to persist, industry executives and experts predict further rate declines at the upcoming January renewals. And while analysts and Keefe, Bruyette and Woods (KBW) agree, they believe that rate declines at 1/1 2016 may not be as steep as initially feared.

After discussions with numerous reinsurance industry executives in Bermuda recently, KBW reports that pricing in the U.S. property cat reinsurance market is “not as bad as feared,” with the majority of executives noting declines of between 2.5% and 7.5%.

KBW said, “While U.S. property catastrophe pricing is still down, most executives described a 2.5-7.5% decline range, slightly better than we’d heard before the trip.”

This will likely come as welcome news to insurers and reinsurers with the key January 1st renewal period just around the corner, a time when many in the sector have warned re/insurers to expect declines of between 5% to 10%, and even as much as 15% in some cases.

Expect the “property market to continue to realise reductions, generally ranging from 5% to 15% on average,” advised Wells Fargo recently when discussing the upcoming renewal season.

While PwC recently predicted rate decreases of between 7% and 9% across property reinsurance and energy business lines. And analysts from ratings agency Fitch Ratings warned that a pricing floor is yet to be reached in the reinsurance sector, signalling further, significant pricing pressures ahead.

One thing is for certain then, reinsurance market rates will continue to decline at the upcoming renewal season, as the wealth of market challenges, including excess capacity, stiff competition and a lack of losses, continues to reshape the market and test participants.

“We were concerned that the mid-year 2015 moderation reflected increasing demand (notably the Florida Hurricane Catastrophe Fund’s private reinsurance purchases), but at this point, we think decelerating rate decreases simply reflect reinsurer discipline,” advised KBW.

As alternative reinsurance continues to influence the market and grow its overall share of the reinsurance pie, the resultant supply/demand imbalance, which is exacerbated by the benign loss environment, has contributed to the decrease in U.S. property cat reinsurance rates, and reinsurance rates globally.

But as highlighted by KBW, a desire from many to effectively and efficiently as is possible in current challenging times, to see rates return to more desirable levels, has resulted in increased market discipline where companies are pulling back on the most pressured business lines, and resisting writing business simply for the sake of it.

Furthermore, with the tough operating landscape to remain in early 2016 and beyond, absent a significant loss event – although some in the sector are now questioning how much of an impact this will actually have on the market – discipline will likely be a vital skill to utilise during 1/1 renewals.

“Decelerating rates decreases are still rate decreases, so we remain pretty cautious on the reinsurers as a group, and we’re cautious about reinsurance brokerage from the perspective of still-falling prices, likely slowing demand,” said KBW.

Globally, however, KBW explains that price declines were generally in the teens, with some accounts declining by as much as 15% to 20%.

But it’s not just pricing that isn’t as bad as some fear in the sector, explains KBW, as the broker community indicated stable terms and conditions (T&C), a shift from the last few years of “buyers pushing for more favourable terms.”

Again, this links to discipline from market participants, and could also suggests increased investor sophistication and risk understanding, resisting the temptation to relax T&Cs from the broker, and similar resistance from investors to agree to such terms, which, can lead to significant overexposure.

“Finally, following about three years of decreases, there’s not a big difference between traditional players’ price and those of ILS, and we think most cedents prefer traditional reinsurance when the offering is the same (or broadly similar) to that of alternative capital, “ said KBW.

As usual there is some confusion about exactly how far rates will decline at the January reinsurance renewals. This is to be expected as many of the forecasts come from initial marketing documentation, which can be tightened up in terms of pricing before the final slips are signed.

Of course, some slips may also see such demand that the pricing reduces before the deals are done on or around 1/1, so until the new year it can often be difficult to understand the actual extent of price reductions.

Read more of our reinsurance renewal season coverage here.

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