Rate rises fading as mid-year reinsurance renewals approach: KBW

The pace of rate rises are fading as the all-important mid-year reinsurance renewal season approaches, leading analysts at Keefe, Bruyette & Woods to suggest that increases are expected to be lower than those seen in January despite the numerous loss-affected accounts that will renew and ongoing hurricane Irma loss creep.

KBW’s analysts join others in forecasting a less than impressive rate environment for the June and July 2018 reinsurance renewal season.

Having visited Bermuda recently, the analysts found that executives from insurance, reinsurance and broking firms all confirmed that “mid-year catastrophe reinsurance renewal rate increases are lagging January 1 increases.”

KBW said that the companies it spoke with reported, loss hit accounts renewing at flat to +5%, with the more heavily affected Caribbean accounts seeing bigger increases.

But the loss-free reinsurance renewals rates are seen as largely flat to down -5%, which will temper the overall rate environment this renewal.

At the same time, the loss hit retrocessional renewals are seeing better increases, of up +7 to +12% on a risk-adjusted basis, although KBW notes this is still below January’s 15-17% rate increases. Loss-free retro accounts are largely seen as flat though.

Again, this shows that the major reinsurers that bulked up in January, underwriting much larger books of property reinsurance business to take advantage of the rate increases seen, could have been prescient, capitalising on the best priced renewals that were going to be available through 2018.

The inability of the sector to secure material rate rises, following the major losses of 2017, shows that the cycle of payout and payback that reinsurance firms had been used to has been significantly muted by a new market paradigm where capital can more efficiently and rapidly flow into the market and be attached to risks.

KBW’s analysts expect that the way the market has responded to the recent catastrophes shows that we can expect “sustained consolidation.”

The analysts expect more consolidation in Bermuda and beyond, as the market adjusts to come to terms with a lower rate cycle with smaller and fewer peaks going forwards, all thanks to the efficiency and availability of capital.

Growth and expense synergies are likely to drive this trend, although valuations are a factor and a “cheaper” deal (perhaps Aspen) could stimulate a much more active wave of M&A.

Catastrophe heavy reinsurance firms are becoming increasingly less viable, hence diversification could also be an M&A driver. But KBW notes that major insurers could target the larger catastrophe managers as acquisitions, given these could help them still earn margin off catastrophe underwriting business that essentially flows to third-party capital.

KBW’s findings in Bermuda mirror those of other analyst firms and add weight to the chances of disappointment again being a key theme with rates at the mid-year 2018 reinsurance renewals.

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