Reinsurers to be disappointed with 1/1 renewal prices: Analysts

by Artemis on November 10, 2017

Global reinsurers might find themselves somewhat disappointed by the level of price increases available at the upcoming January 1st 2018 renewals, with industry experts warning that rates might not react to recent losses in the way many in the industry are hoping for.

cash-squeezeThis was the message from research analysts speaking on a panel at the 2017 Bermuda Reinsurance Conference, organised by S&P Global Ratings and PwC Bermuda, which suggested that the expectation of significant rate increases at 1/1 may be overly optimistic.

In light of high levels of catastrophe losses in the third-quarter, which is expected to be one of, if not the costliest quarter on record for catastrophe losses, reinsurers have expressed increased optimism that rates across the sector will improve in the coming weeks and months after years of falling prices resulting in a softened market environment.

However, various factors, which includes the influence of alternative capital, could serve to limit any price increases, meaning that reinsurers hoping for substantial increases at 1/1 might well be disappointed with the new market dynamics.

Robert Hauff, Managing Director of high-grade research, Wells Fargo Securities, said; “I think there will be some price increases, but we’re pretty cautious in the approach here because companies have come through this in pretty good shape – and a lot has to do with alternative capital.”

The influence of alternative, or third-party reinsurance capital on the pricing dynamics of the global reinsurance sector was also highlighted by panellist Jay Gelb, Managing Director of equity research at Barclays Capital.

Gelb underlined the growth of alternative capital over the last decade, which, means that unlike previous large loss years the market remains well-capitalised even after an expected $100 billion of losses in Q3 alone, suggesting market dynamics still favour buyers of protection.

“It doesn’t feel like 2001 or 2005 when there were big supply-demand imbalances. I think the reinsurers will really try to hold the line on price increases, but there’s still a lot of capacity there,” said Gelb.

According to reinsurance broker Aon Benfield, alternative capital grew by 10% during the first-half of the year to nearly $90 billion, which, combined with the strong balance-sheets of reinsurers and the reported side-lined capital waiting to enter, suggests the market still has a lot of capacity, even after the impacts of recent hurricanes and earthquakes, and the extremely costly California wildfires.

At the same time, reinsurance rates have fallen roughly 40% over the last decade, and Gelb explained that increases of 10% – 15% would only be the start of a market recovery.

“I don’t think rates are going to be up as much as people are talking about. I’m thinking more in the 5%-15% range on P/C pricing for Jan. 1. We said in the spring that if there were $100 billion of insured losses, it would stabilize pricing – and we’re sticking by that,” continued Gelb.

Analysts’ conservative stance on potential rate increases is contrast to the expectations of many market players that will clearly be hoping for as bigger rate increases as possible at 1/1, with some in the market already reportedly seeing rate increases of up to 50% in loss-affected and loss-exposed U.S. property lines.

Competition is expected to remain intense at the January renewals, particularly for catastrophe business, so relationships will likely be highly important as market players fight for business and push for rate increases.

However, a desire to maintain relationships and appease clients could be another factor that mitigates any price surge, warned panelists.

“They want to talk up pricing – and I would too, if I were them – but you have to balance that with economics. Do you want to lose renewals?

“The pricing in any line of business will be determined partly by supply-demand, but the other issue is expected returns. The question is: Have your expected returns changed because of the losses?” said Jay Cohen, Managing Director at Bank of America Merrill Lynch Global Research.

As we’ve written a number of times since the catastrophe events, there is ample capital ready for deployment at 1/1, and while some may be trapped it’s looking like both ILS managers and reinsurers are likely to enter the first-half of 2018 with sufficient capacity to meet all demand.

This should dampen some pricing down and factors such as the appetite of catastrophe bond investors could weigh further pressure on rates at renewals, making the dynamic at 1/1 fascinating to watch and the first-half of next year a chance for significant ILS market growth.

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