Reinsurance prices declined, but terms more stable at 1/1 renewal: Morgan Stanley

Pricing in the global reinsurance market declined for the third year in a row at the recent January renewals, with any slowdown in property catastrophe decreases offset by further pressures on other business lines, according to analysts at Morgan Stanley.

Following global reinsurers reporting on their January renewals Morgan Stanley discusses the softening reinsurance price environment, which continued to decline at the key 1/1 renewals, where up to 70% of business is renewed.

The more sizeable reinsurers reported slightly reduced rate declines when compared to the smaller, or medium-sized players, but rates for all across non-proportional business remained under significant pressure, says Morgan Stanley.

Although, “with proportional business holding up better owing to more favourable primary pricing feeding through to this line,” notes Morgan Stanley.

Analysts also highlighted an increase in transactional size on the proportional business side at 1/1.

As reported by many in the sector since January renewal season, property catastrophe rate declines did slow somewhat compared to previous years, due to a rise in demand and also the reduced entry of alternative reinsurance capital as investors look for more desirable returns elsewhere.

One such area predicted to experience an influx of capacity from the capital markets, and traditional sources during 1/1 and beyond was casualty, as competition and continued rate declines push reinsurers and ILS funds and managers to look for yield outside of the pressured U.S. property cat space.

However, Morgan Stanley notes that “casualty pricing seemed to be more stable, and we think management are taking a more positive outlook on U.S. casualty.”

“Munich Re reported good stabilisation in casualty proportional business and Hannover Re reported mostly stable with a slowing rate of reductions on US casualty,” explained Morgan Stanley.

Munich Re and Hannover Re are of course two of the larger reinsurance companies operating in the world; so some of the other, smaller reinsurers might have experienced a tougher casualty market during renewals.

Furthermore, it’s been noted by many industry analysts, experts, and executives that casualty lines are likely to experience additional rate pressures and subsequently declines in the coming months owing to a shift in capital deployment.

So it would be wise for market participants to keep an eye on casualty lines as we move further into the year and the softening landscape persists.

One positive the analysts at Morgan Stanley does highlight is that terms and conditions were better during 2016 renewals than the previous year, when there was a rise in aggregate covers and an extension of the hours clause, a sign of increased market discipline and sophistication, especially during times of turmoil.

“Most reinsurers cited that the clauses had been established last year and there were no meaningful changes this renewal period,” says Morgan Stanley.

And the sophistication and most importantly discipline experienced at renewals will need to be maintained across the reinsurance sector if firms wish to successfully navigate the challenging operating environment.