Capital curtails 1/1 renewal rate rises, disappointing reinsurers: Willis Re

The availability of risk capital has curtailed reinsurance renewal rate rises at the key January 1st 2018 contract signings, with global property catastrophe and risk programs only seeing average risk adjusted price rises of 0% to 7.5%, according to broker Willis Re.

The general perception of the January 2018 reinsurance renewals will be one of disappointment for many, as rate increases have failed to live up to expectations and reinsurers have struggled to achieve the price rises they had been calling for.

Meanwhile the availability of capital has not diminished, despite the estimated $136 billion of insurance industry losses suffered in 2017, with the market dynamic continuing as it had before these losses, as the weight of capital pressured rates at the renewal season.

While reinsurance firms had been hoping for a significant change in the market dynamic, with the losses having severely impacted ILS capital, the market has responded robustly, with fresh capital ready for the renewal and ILS fund managers trading forwards to help their cedent clients in a time of need post-loss.

The outcome many reinsurers were hoping for was that at January 1st the ILS market would still be struggling to make capacity available to underwrite risks, but hopes have been dashed and ILS funds remain a key and growing component of the overall global reinsurance sector.

In its latest 1st View renewal report, reinsurance broker Willis Re highlights the disappointment of reinsurers, but at the same time the admirable way with which the market, both traditional and alternative, has dealt with its losses and traded forwards into the renewals.

The global reinsurance market has weathered the catastrophe losses well, Willis Re explained, but the outcome is disappointing for some that had hoped for a return to the sharp post-loss price rises of the past.

Willis Re explains the factors curtailing price increases at 1/1, “Pricing corrections have not seen a significant spike due to the combination of strong reinsurance market capitalization, losses being split over a number of different events and the fact that a large tranche of the losses were retained in the primary market.”

The broker explains that the “shape” of the global reinsurance market in 2017 was significantly different to the one witnessed in previous major loss years, with insurance-linked securities (ILS) capital making up a considerable proportion of the market’s available capacity.

With traditional reinsurance firms also robustly capitalised, the result is a continuation of excess capital, with the weight of capacity ensuring that pressure remained on pricing, curtailing the rate increases that reinsurers were able to achieve.

As a result, pricing across global property catastrophe and risk programs experienced risk adjusted rate increases averaging in a range of 0% to 7.5%, far below the 20% or so that some companies had been hoping for.

There were some outliers on either side of this range, Willis Re explains, although even there, on the worst loss affected accounts it does not seem price rises were as high as hoped for.

James Kent, Global CEO of Willis Re, commented, “Clearly the 2018 renewal season will for many reinsurers be a disappointment in terms of the rating levels achieved. However, this must be balanced against the ability of the market to provide buyers with stability of capacity at reasonable prices with an orderly renewal process, which demonstrates the growing advancement of the market.”

Kent said that the, “Continued supply of capital has produced a different set of dynamics over the current renewal season than reinsurers might have traditionally anticipated. Although the losses have stopped a further downward movement in risk-adjusted rates in most markets and classes, the continued supply of capital has helped curtail widespread increases in risk-adjusted rates particularly on loss free portfolios.”

Reinsurers have generally been unsuccessful at securing the rate increases they hoped for, however Kent highlighted that the general stabilisation of reinsurance rates does bode well for the rest of 2018 for reinsurers.

This is true, as reinsurance pricing starts the year from a slightly higher level, however the question will be how rates react at the next renewal seasons in April and June, with the main question being whether stability remains or we see a return to a slow decline in pricing.

Kent also highlighted the ability of reinsurers to manage their exposure to losses and trade effectively into the renewals, “As society as a whole is starting to look more closely at the role the global reinsurance market can play in helping to close the economic loss gap, the stability of the market bodes well for its future development.”

Kent also said that the disappointment of reinsurers needs to be balanced with an appreciation of the way the reinsurance market responded to its losses in 2017 and delivered product to its clients at the renewal season.

Commenting on the major losses witnessed in 2017 Kent said, “No commentary on the January 1 renewal season can overlook the scale of human suffering and economic loss that the catastrophes in the second half year of 2017 have caused. The global reinsurance industry is central to alleviating the impact of the 2017 hurricane losses. The speed of claims payments from reinsurers to their clients has been exemplary and the value of reinsurance has been illustrated to many clients yet again.”

Perhaps most disappointing for reinsurers will be the fact that catastrophe loss hit U.S. accounts only saw rate increases of between 5% and 10%, while the Caribbean saw 20% to as much as 40%.

The ILS market and alternative capital will have had a significant dampening effect on U.S. property catastrophe rate increases at 1/1, resulting in greater stability in that marketplace than perhaps anywhere else.

Even the retrocession market only saw rate increases averaging at 5% to 15%, with loss hit accounts seeing rate rises of up to 30%. This is testament to the ability of ILS markets focused on retrocession to reload and recapitalise in time for the renewal season.

Overall the January renewals have been a disappointment for many reinsurers, meaning the focus will now naturally shift to their ability to boost profitability, reduce expenses and lower their costs-of-capital.

As a result, the ILS market and capital providers are likely to come under increasing focus as we move through 2018, with traditional companies likely to continue leveraging third-party capital as a way to enhance their efficiency while ILS funds continue to grow their market shares.

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