Optimism & panic at renewals, but improving reinsurance returns expected

There is a mix of optimism and panic as the key January 1st reinsurance renewal rapidly approaches, after losses, market improvement programs at Lloyd’s and a chaotic retrocession market, all continue to make conditions challenging for some.

But the longer-term outlook is for improving reinsurance returns generally, which will encourage ILS investors who are largely set to hold steady for January as they await the outcome of late and sometimes hotly contested renewals.

We’re being told that some markets, both traditional reinsurance and insurance-linked securities (ILS) funds, are still not quoting on renewal requests, even at this late stage.

There is an expectation that these reinsurance renewals will be particularly late and we also understand that the disorderly renewal at Lloyd’s continues, as we explained previously here.

We’re told things are not progressing as quickly as either the syndicates or their brokers would like, which with only a few working days left this year suggests a very testing final week or so of 2018.

Analysts at JMP Securities said that after visiting Lloyd’s they saw the impacts of the Lloyd’s Decile 10 performance drive, combining with the “growing chaos in the retro market creating an atmosphere that is a mix of optimism and panic as the key January 1 renewal rapidly approaches.”

However, there are reasons to be cheerful, once this difficult renewal period has been passed, as the analysts forecast hardening rates in reinsurance, as primary lines are already almost all leading the way.

The fact the January renewals are heavily weighted to Continental Europe means the uptick in reinsurance rates hoped for is not being seen as meaningfully as was expected, despite the loss experience of recent months.

The major reinsurers are keeping rates flat on these large European renewals, our sources suggest.

But we’re also told by ILS fund sources that they are seeing rate increases on many renewals, although they do tend to avoid a lot of the larger European programs as pricing can be so unattractive there.

The analysts from JMP say there is a “relative standstill” in U.S. renewals still, which likely refers to the lack of quoting we mentioned above.

Those who are quoting though are largely finding rates firming, with some ILS funds telling us 5% to 10% increases are being achieved on some of their privately negotiated arrangements.

Overall, the analysts warn that January 1st renewals may be disappointing for the equity investors they report for. This is likely due to the large European players not pushing for the rate increases that many believe should be seen on large European reinsurance programs.

There could be a competitive dynamic driving this, we believe, as if the rates did increase on these layers it is almost certain that the ILS market would show greater interest in underwriting them.

Primary pricing at Lloyd’s is “almost universally positive” the analysts say, with property direct and facultative (D&F) rates seen up by mid-teens in some cases.

Reinsurance rates are harder to decipher, the analysts point out, but they do feel rising rates are likely throughout 2019, which aligns with the views of most other analysts and the markets we’ve spoken with, who universally say Florida and some other U.S. property catastrophe rates have to rise.

Loss creep from Irma and the chances of a constrained retrocession market will both be factors that can help drive Florida rates higher, the analysts believe.

The uncertainty over retro pricing is resulting in a standoff, with rates for January seen to be rising 20% to 30%, according to these analysts.

“This disconnect will have to be ironed out, and we believe it will ultimately be through higher property cat reinsurance pricing, as capital in the retro/ILS market is likely to shrink not expand as we enter 2019,” they explain.

The expected shrinking of ILS capital is unlikely to last for long through the year, especially if the prospects are for improving reinsurance returns as 2019 progresses.

The retrocession market is without a doubt constrained for capital as it enters the final phases of renewal negotiations and we continue to hear that some traditional markets are looking to capitalise on the crunch on collateralised retro capacity.

In addition, we understand that there continue to be pushes for firmer terms on collateral release which is making some ILS markets walk away from long-term clients, we’re told.

But it seems the ILS markets that operate at lower-volatility ends of the risk spectrum continue to progress their renewals and are achieving some rates increases, while also adding a little extra capital as well.

So this 2019 renewal looks set to deliver a very different experience to ILS and collateralised markets, depending on which end of the risk tower you are focusing your underwriting on.

Optimism and panic is a good way to describe this renewal, as from our discussions with markets there is clearly an abundance of both.

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

Also read:

Major UNL retro programs hit market at relatively flat pricing & terms.

Flat reinsurance & harder retro at 1/1, but 10%+ increases for mid-year renewals.

A $200bn catastrophe loss year (that took 18 months to accumulate).

ILW pricing stays relatively flat since recent catastrophe losses.

Aggregate ILS returns questioned after recent losses.

Cat bond sell off adding mark-to-market pressure.

QBE avoids rate hikes with early renewal, increases reinsurance limit.

More discerning, less rush to commit capital – healthy ILS trends for 2019.

Lloyd’s renewals said in disarray. Late renewals may come back to bite syndicates.

Post-loss fundraising set to be more challenging for (some) ILS funds.

Traditional reinsurers targeting retro opportunities at renewals.

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

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.