ILS pricing lows to cap post-event reinsurance price rises

The fact that insurance-linked securities (ILS) funds and collateralized reinsurance markets have seemingly been more aggressive on pricing at the recent April renewals does not bode well for the mid-year’s (as we’ve been saying), but also suggests that any post-event price rises are likely to be capped, according to analysts.

It seems that with every renewal season that passes, the expectations that reinsurance prices will bounce back significantly when the next major losses strike the market become lower as the reality of the pricing environment and appetite for risk sink in.

ILS funds and investors have clearly demonstrated the lower-cost of their capital in recent years, with this seemingly reaching new lows (at least in the catastrophe bond market) in recent weeks.

As the ramifications of this sink in, the forecasts for the June and July mid-year reinsurance renewals are becoming less rosy, and the chances of traditional players ever seeing the pricing they once enjoyed look increasingly slim.

We’ve been talking about a “new normal” in reinsurance market pricing for a number of years (this from four years ago, or this from 2015, or this from last year are good examples), as the increasing prominence of the capital markets has gradually exerted pressure on traditional players to match their pricing marks.

At a time when traditional reinsurance capital has been at excess levels, while the traditional market has been increasingly willing to discount for diversification, the effects have been dramatic for sure.

All of which has led to the understanding that pricing may never again get back to the levels seen only five or six years ago, but at the same time many believed the cycle would continue to respond as they had experienced before.

But as the efficiency of ILS and capital market’s continues to be felt and demonstrated in pricing and risk appetite, the likelihood that we are now in this “new normal” world of reinsurance pricing seem a lot higher.

Analysts at Peel Hunt expressed surprise that ILS market’s have reached a new pricing low, “as there was evidence of a more disciplined approach from the alternative capital market during the US renewals last year and at the
1 January renewals.”

But this is perhaps not so surprising at all and is rather a case of timing, with the opportunity to take greater market share from traditional markets much clearer in 2017 now that the traditional reinsurers have exerted much of the opportunities they have to be flexible on pricing.

It’s also the case that the pricing marks seen in catastrophe bonds and collateralised reinsurance markets are, while low for ILS, often not really lower than the traditional market has cut its pricing too, when you factor in the broader coverage that can be available there.

But it is a reflection of a new level of comfort among ILS investors and a willingness to be more aggressive on pricing in order to secure more risk for their investment portfolios and it is this that may signal a new normal has been reached.

“This does not bode well for the June/July renewals in our view and caps any possible turn in the soft pricing cycle, even post a major event,” Peel Hunt’s analysts explain, which certainly seems the likely scenario from here on.

With it widely accepted that reinsurance rates are down anywhere from 30% to as much as 50% over the last four-years, depending on the line of business, region and loss experience, it seems increasingly likely that not even half of that decrease would ever be recouped, even after really major loss events occur.

A cap on the ability of the reinsurance market cycle to rebound seems assured, the question will be just how low a level it comes in at.

Join Artemis in Singapore on July 13th 2017 for ILS Asia