Capital could still limit 1/1 reinsurance rate increases: KBW

Despite estimating global catastrophe losses of $92.5 billion in the third-quarter of 2017, analysts at Keefe, Bruyette & Woods (KBW) expect the availability of both traditional and alternative reinsurance capital to limit rate increases in 2018, while market themes persist.

Q3 2017 has been one of the costliest quarters on record for global catastrophe losses, driven by three major hurricanes and two Mexico earthquakes, with smaller events also playing a part. Now with the California wildfires also adding to the bill for reinsurance and ILS firms, many hope rate increases will help them earn back at least a portion of their losses.

After several years of rate declines and a prolonged softened market cycle, reinsurers are hoping for rate increase at the upcoming, key January 1st, 2018 renewal season, on the back of recent catastrophe losses.

But while industry analysis has suggested rate increases of five, even ten percent or more at 1/1 for loss-effected regions, any meaningful, and especially broader impact on reinsurance pricing is likely to be limited as a result of the abundance of capacity in the sector from both traditional and alternative sources.

“Barring additional losses, contingent capital (including both alternative capacity and traditional reinsurers responding to rate increases) will probably limit 2018 rate increases in both scope and duration,” said KBW, in a recent report.

Of course, and as highlighted by KBW, substantial losses in the fourth-quarter could result in the kind of rate increases the reinsurance industry hopes for. But so far, the California wildfires alone do not seem big enough to significantly move the price expectations any higher.

Despite any market dislocation caused by recent events, the reinsurers still holds excess capital and, combined with the expectation that a substantial volume of third-party capital is sat on the sidelines waiting to take advantage of any pricing movements, price surges are expected to be dampened.

The impact of insurance-linked securities (ILS), or alternative capital on the broader re/insurance industry continues to deepen, and the combination of hurricanes Harvey, Irma, Maria and the Mexico earthquakes, is widely viewed as the sub-sector’s first real test.

But previous fears of investors running away post-event appears to have faded, with reports suggesting that ILS investors and funds remain attracted to the space in spite of the largest losses they’ve ever suffered, underlining the increased maturity and sophistication of the third-party reinsurance investor-base.

As a result, beyond 1/1 the expectation is that longstanding themes persist, such as fading reserve releases and pressured investment returns, while capital rebuilds and adds pressure on top of reinsurance rates once again.

The question is whether discipline can help to hold up rates in loss affected areas for more than one annual cycle, or whether by this time of next year we’ll be discussing how much rates may slip by at 1/1 again.

Join us in New York in February 2018 for our next ILS conference