Investors appetite post-loss not what reinsurers wanted to hear: A.M. Best

by Artemis on January 18, 2018

The fact that third-party investor appetite to allocate to catastrophe bonds and insurance-linked securities (ILS) has not been dented after the major catastrophe losses of 2017 is not the news reinsurers had been hoping to hear, according to rating agency A.M. Best.

Many reinsurance firms have suffered large losses from the catastrophes of 2017, including hurricanes Harvey, Irma and Maria, the Mexican earthquakes and California wildfires, and despite the fact reinsurance capital levels remain high the market had been hoping for steeper increases in pricing at key 1/1 renewals.

Rating agency A.M. Best notes that as a result of the losses, “Re/insurers are likely to shrink their capacity or increase pricing in these areas, specifically the Caribbean and Florida.”

Additionally reinsurers are likely to use more third-party backed reinsurance and retrocession capacity, as a result of the significant losses, meaning they could “Expand their use of reinsurance or retrocessional protection, with the significant involvement of the capital markets.”

However the rating agency acknowledges the influence that third-party capital and ILS is set to have in 2018, saying, “With fierce competition in the current marketplace, new market entrants will be more than happy to step in, meaning rate hikes could be suppressed.”

The losses from the three hurricanes are expected to reach as much as $90 billion, A.M. Best says, but they have been spread among primary insurers, reinsurance firms, collateralized reinsurance and insurance-linked securities (ILS), so the impacts to any one segment are not as severe as they could have been.

The losses fall within expected risk tolerances, the rating agency explained, although there could be some adverse development. Given the aggregation of losses across major catastrophe events in 2017 the retrocession market is one area that has been particularly affected, but it’s still too early to define exact losses and all of the aggregate catastrophe bonds which could face a loss.

While some ILS investors have faced losses, much of the eroded capacity of the alternative reinsurance marketplace has been replenished in fourth-quarter fund-raising and the ILS fund market came through the January renewals with more capacity than it went into them.

Despite the losses, A.M. Best says, “Investors seem eager to invest in cat bonds, even after experiencing some losses, which is not the news that reinsurers had hoped to hear.

“Investors are still viewing ILS as worthwhile investments to increase yield, specifically for cat bonds in riskier tranches, and investment in ILS should continue to grow while other spreads remain compressed.”

The report from A.M. Best goes on to explain that rate rises were likely to be suppressed at the January renewals, as has now proven to be the case by the broker reports on that key contract signing period.

With the appetite of ILS investors not dampened, it is expected that this sector will continue to grow and that as a result the competition for renewals throughout 2018 could be even higher, as the losses from 2017 get dealt with.

But even ILS funds do want to see rate rises sustained for as long as possible, many managers having felt some property catastrophe reinsurance rates had dropped too far.

But A.M. Best warns that we could see, “Ample capacity from both traditional reinsurers and alternative capital providers most likely suppressing price increases more than either party would like,” which is precisely what has been witnessed at 1/1.

“Capital has been flowing back into the (re)insurance markets, so we do not expect a significant change in investors’ appetites for insurance risk over the short term,” A.M. Best continued, adding that going forwards “Third-party capital may act as a moderating influence on rate hikes,” which is a continuation of what we’ve seen over recent years.

Post-renewal reinsurers are now digesting the ramifications of their underwriting over the period, with a realisation that rate increases have in some cases been much lower than originally hoped for.

The news was not what they hoped for and now it is a case of having to make the best of it, while returning to the realisation that the reinsurance cycle has changed, availability of efficient capital is driving the rate environment and they need to return to their own efficiency initiatives, as the status-quo in the market has not been changed significantly by the major catastrophe losses.

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