Reinsurance renewals may hold “surprise to the upside” – Twelve Capital

There is the potential for the 2019 reinsurance renewals to hold a “surprise to the upside,” according to ILS investment manager Twelve Capital, who suggests that rates may be better than the market currently anticipates after the major losses of recent months.

This would be welcomed by many ILS funds and most of the ultimate investors in ILS, among who there are numerous that believe it is time for a reassessment of reinsurance rates and pricing.

There is a widely held feeling in the market that rates did not rise sufficiently after the 2017 hurricane losses and that the resulting loss creep only served to underscore that.

In addition, the aggregation of a number of other catastrophe loss events over recent months have served to exacerbate the trapped capital position of the ILS market, putting some funds and collateralized reinsurance and retrocession vehicles in the difficult position of not having sufficient capital available to even renew their core portfolios.

Hence any surprises, in terms of higher than expected rate increases across reinsurance and retrocession renewals, will be welcomed with open arms.

Twelve Capital said that base expectations are for the market to remain at least stable at 1/1 2019, while there is greater confidence in being able to secure higher rates in April given Japanese insurers tendency to value relationships more.

In addition, greater rate increases are anticipated for certain specialty lines at Lloyd’s, especially property covers for non-standard risks.

But the ILS fund manager also notes the “potential for surprise to the upside from these modest base expectations given a recent more positive shift in sentiment around 1/1 renewals.”

Sentiment on reinsurance pricing has gradually been on an upward trajectory, which markets hope will be the same for rates.

Whether that comes to fruition remains to be seen, especially as the renewals are destined to be competitive again as traditional reinsurers have seen a chance to fight back and perhaps claw back some market share in property catastrophe reinsurance and retrocession from those with trapped capital issues.

Twelve Capital may be right, the way renewals are headed and given the challenges faced, we could see some pockets of much better than anticipated rate improvements, particularly where capital is truly thin on the ground and the products more specialised.

However, the appetite of the big four European reinsurance firms remains undeterred and having seen the significant portfolio growth they achieved last year on very slight rate increases, if the rates do increase by the same or higher at 1/1, it’s likely these major players will upsize their appetites once again.

Similarly, the appetite of the big reinsurers to dominate in Japan (and other regions such as Europe) remains intact after the catastrophes of recent months, suggesting they will be looking to secure as much of any payback that is offered for themselves.

This all points towards a renewal where we may see ILS capital being particularly conservative, while major reinsurers go for growth once again.

One wildcard is the appetite of re/insurers that have in-house third-party capital management and whether they will also go for growth supported by their own pools of managed ILS capital.

It looks like a renewal where there will be opposing forces at play.

Those seeking a rate of return more commensurate with the recent loss experience of the property catastrophe underwriting industry, versus those able to diversify that exposure away and with the excess capital on-hand to do that in spades.

Surprises may be found, but they will likely be in pockets and, we’d suggest, are unlikely to be as surprising as some would hope for.

Read more of our coverage related to the upcoming reinsurance renewals.

Also read:

2018 is the real test for ILS investors: Lohmann, Secquaero.

Cat bond liquidity benefits evident, as ILS funds sell to free up capital.

Some ILS funds struggle to even renew core portfolios, let alone grow.

Property catastrophe rates to rise at 1/1 & beyond: Everest Re management.

One sidecar pulled on lack of investor appetite, others questioned on terms.

Capital availability & losses to drive reinsurance rates at 1/1 renewals.

Retro losses could drive price increases in 2019: Goldman Sachs.