Too early to call the bottom for catastrophe reinsurance prices: Moody’s

Despite the signs that pricing pressure is easing across global property catastrophe reinsurance pricing, it is still “too early to call the bottom” of the pricing cycle at this time, according to rating agency Moody’s Investors Service.

In a new report on the state of the global reinsurance market and released in time for the 2016 Monte Carlo Rendez-vous, Moody’s explains that further pressure is ahead and that prices in reinsurance still have some room left to fall even further.

The reinsurance market remains highly capitalised, with both record traditional and alternative capital combining to force down prices across the market. This price pressure is spreading as well, particularly as alternative capital and insurance-linked securities (ILS) funds expand their reach more deeply into reinsurance and also into some primary insurance markets.

Moody’s notes that this “abundance of traditional and alternative capital” is exacerbating challenges created by “tepid demand” for the reinsurance market’s products.

As a result Moody’s says it remains negative on the prospects for the global reinsurance industry, across the next 12 to 18 months, as this “supply-demand imbalance” looks destined to continue.

“The negative outlook reflects the continuation of long-term challenges for the global reinsurance industry,” explained Moody’s analyst, Sid Ghosh.

“These include the ready availability of traditional capital and the steady growth of alternative capital, at a time when demand for reinsurance is broadly flat, leading to lower pricing and profitability, in conjunction with historically low investment yields,” he continued.

There has been a lot of talk of the reinsurance market finding the bottom, in terms of pricing, with reports of stability being seen at recent renewals and a broadly stable pricing environment hoped for in January 2017.

However, Moody’s does not subscribe to this belief that we may have seen the end of price declines, saying that even the most pressurised market of property catastrophe reinsurance could still have some room for rates to decline even further.

“Alternative capital has made the most inroads into the commoditized property catastrophe sector,” Moody’s explained, but adding; “While there are signs that pricing pressures are easing in property catastrophe, it’s still too early to call the bottom.”

In fact, at a pre-Monte Carlo Rendez-vous media briefing held in London this morning, Moody’s analyst Brendan Holmes told the journalists attending that reinsurance pricing could fall by as much as 5% through 2017 and that the rating agency expects this softness to continue into 2018 as well, reported Reuters.

That does not bode well for improving reinsurers profitability, which is already on the edge. With returns declining steadily, reinsurers are reliant on extracting what pricing profit they can, but as softness persists generating reinsurance profits is not going to get any easier for the traditional market.

That is going to make the responses from reinsurers over the coming months key to their profitability and in some cases survival, as lets not beat around the bush if softness does persist some reinsurance companies may not survive through 2018.

As we wrote just the other day, there will have to be a response as reinsurers cannot just carry on regardless. That makes innovation, adaptability, product design, customer focus, as well as the embrace of efficient capital and business models key to reinsurers future survival.

Moody’s agrees, saying; “This difficult environment is leading reinsurers to adjust their business models.

“Alternative capital management is becoming an important part of many reinsurers’ strategy. A number of firms remain committed to the pure-play reinsurance model while others pursue a hybrid insurance-reinsurance strategy, but no model has yet demonstrated its superiority.”

Moody’s puts reinsurers and their potential for success into two brackets.

Firstly, those reinsurers that can “achieve strategic alignment with their insurance counterparties through scale, breadth of coverage or unique expertise,” stand the best chance of success.

But for the rest of the reinsurers, particularly those “unable to differentiate themselves” a competitive, challenging and uncertain future is ahead, as they “increasingly have to compete on price.”

So that’s now all of the four main reinsurance rating agencies unanimously calling for ongoing pressure, reducing returns, continued growth of alternative capital and the need for innovative responses in order for reinsurers to navigate these challenging times.

It’s hard to think the outlook will be much rosier from any other firms that analyse the industry, including the brokers, so we may have to wait to hear from the reinsurance companies themselves for a brighter outlook under the Monte Carlo sunshine.

Read all of Artemis’ Monte Carlo Rendez-vous coverage here.