Reinsurance prices to continue decline into 2016 absent demand: Macquarie

Absent a continuation of the increased demand witnessed in the reinsurance sector during mid-year renewals, analysts have predicted that pressure on reinsurance pricing will continue into 2016, unless a significant loss event occurs.

Analysts at Macquarie noted that during mid-year renewals it was the new demand, largely in Florida, that was the “driver of better-than-anticipated price decreases,” despite the belief and optimism from some in the space that reinsurance pricing is perhaps nearing a floor.

The analysts continued, stressing; “Unless new demand continues to enter the market, we still feel reinsurance pricing will be pressured further in 2016 if we fail to see any significant losses in the re/insurance industry.”

Commentary from certain firms during the June/July renewal season signaled some rate stabilisation in property catastrophe reinsurance, but while pricing might be beginning to plateau in some peak areas, the general expectation is that rates will continue to fall to a degree.

This notion was echoed by analysts at Goldman Sachs and Keefe, Bruyette & Woods (KBW) recently, covered at the time by Artemis, who said the stable but structurally lower property catastrophe reinsurance pricing is likely to persist and remain into 2016.

Although predicting a similar outcome, the analysts at Goldman Sachs and KBW did stress that structurally lower but stable reinsurance pricing would likely remain regardless of any future losses, so a slightly differing outlook than the analysts at Macquarie.

An increase in demand at mid-year renewals is certainly a positive, as typically, in recent months the wealth of traditional and alternative sources of re/insurance capacity in the sector has outweighed the demand.

Something that was highlighted by industry experts at the 2015 Global Insurance Forum in New York earlier this year, who urged the industry to utilise the glut of reinsurance capital, analytics and technology to innovate and find a supply/demand equilibrium in the global reinsurance market.

One thing that can help keep demand for reinsurance at a reasonable level during a testing market environment is via product innovation and development.

Something that was discussed by Credit Suisse in the early months of 2015, when it noted that the structurally lower cost of reinsurance capital presented an opportunity for property and casualty (P&C) insurers to develop, innovate and work with emerging structures and business models.

So while a wealth of capital continues to enter the space from traditional reinsurance companies and new, emerging players in the insurance-linked securities (ILS) landscape, analysts at Macquarie stress the importance of this new demand persisting if a deceleration of rate declines is to remain.

Should demand falter, and the over-supply of reinsurance capital persevere, Macquarie feel that pressure on pricing will likely continue throughout 2015 and into 2016, unless the re/insurance industry falls victim to a significant loss event.