Deutsche Bank says pricing will deteriorate further in reinsurance

Analysts at Deutsche Bank have joined the camp expecting reinsurance pricing will continue to deteriorate into 2017, citing the structural issue of continuing overcapacity in an environment where major losses are scarce and investment yields remain low.

There’s been no change to the reinsurance market environment in the last year, aside from a continuation of the pressure traditional companies face and an increase in the number and sophistication of their competitors.

Despite there being a number of larger catastrophe losses, such as the Canadian wildfires, Japanese and New Zealand earthquakes, hurricane Matthew and the Louisiana floods, none have been sufficient, either alone or in aggregate, to use up reinsurers catastrophe budgets.

As a result there is an expectation that capital will continue to build, excess capacity will persist and thus pressure will remain on pricing.

Deutsche Bank’s analysts explain; “The structural issue of continuing overcapacity in a favourable claims and still low yield environment thus remains unaltered. Reflecting this, we expect pricing in reinsurance markets to deteriorate further – although at a flattening rate.”

The impact of continued price declines will hit the major reinsurance companies, with the analysts saying that firms like Munich Re and Swiss Re could see a half percentage point hit to their combined ratio and a quarter of a percent hit to Hannover Re and Scor, based on their lower natural catastrophe exposure.

That suggests that once again price declines in catastrophe reinsurance lines are considered likely to be highest, although the market is anticipating further renewal rate pressure on specialty, life and casualty lines as well.

With pricing likely to continue to deteriorate, margins will continue to get slimmer, making efficiency increasingly important. Deutsche Bank’s analysts say that tiering of the market is likely to continue as well, meaning the larger players are thought most likely to be able to secure the more attractively priced business they need.

The reduction of exposure to natural catastrophe risks is also anticipated as a trend that will continue at the major reinsurers, as they focus on other lines as well as directly selling customised or tailored risk transfer to large corporate buyers.

Negatively, Deutsche Bank’s analysts see reinsurers as “offering the least scope for underlying earnings growth.”

They also anticipate reinsurer stocks underperforming in a rising yield environment, which will not be what the average CFO at a major reinsurer wants to hear.

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