Insurance rate rises offset capital markets impact on reinsurance, for some

As we wrote yesterday, insurance-linked-securities and third-party capital will continue to pressure reinsurance pricing for the foreseeable future. For some, the decline in pricing seen in property catastrophe reinsurance lines of business caused by capital markets and alternative capacity sources can be offset by rate rises on U.S. property and casualty insurance rates.

This insight comes from a Lloyd’s of London focused insurance and reinsurance business, Hampden Underwriting Plc, which is an underwriting company established to give investors direct access to the Lloyd’s market, largely focusing its portfolio on property insurance, reinsurance and motor business.

Hampden Underwriting has today announced its results for the full year of 2012. In the results announcement it becomes clear that it’s not just the global reinsurance sector that is noticing the impact of third-party capital on reinsurance rates, businesses like Hampden Underwriting are also seeing the effects of capital market participation in reinsurance.

Sir Michael Oliver, non-executive Chairman of Hampden Underwriting, commented that the firms Lloyd’s adviser is seeing clear signs of improvements in property and casualty insurance rates. Oliver said that this improvement of P&C insurance rates is; “Offsetting, to some degree, the new competition from the capital markets which are competing for reinsurance business such as through the issuance of Catastrophe Bonds and other structures which is likely to have an adverse effect on reinsurance rates for the June and July renewals.”

The financial report from Hampden includes market insight from the firms Lloyd’s adviser. The report says that the most significant issue affecting the reinsurance industry in 2013 is the convergence of traditional and alternative sources of reinsurance capital. The market is in a state of flux, in advance of the mid-year renewals for reinsurance business, and with rate reductions of 10%+ forecast it will have an impact on Hampden’s Florida reinsurance business margins.

Hampden’s is in an interesting position where it can shift focus from catastrophe reinsurance to property and casualty insurance, where rates are looking more attractive according to the report. The report says that a sustained upturn in property and casualty insurance rates in the U.S. is being seen. It notes that this class of insurance business does not suffer from the same ease of entry by alternative sources of capital as currently seen in the reinsurance market.

These insurance rate rises have apparently continued in 2013, with average rises of 5.2% in the first quarter of this year. The report suggests that a ‘healthy rebalancing in the relative attractiveness of writing insurance business compared to reinsurance business’ is underway. Hampden’s report suggests that the insurance cycle may have turned a corner at a time when the reinsurance cycle is becoming less attractive. The report also notes that time will tell whether alternative capital remains in the reinsurance market after a major loss event and prove dependable for insurers.

It’s interesting to see this perspective from a business that offers a similar proposition to investors as the specialist insurance-linked securities and reinsurance-linked investment managers do. They all offer a way for investors to access low-correlated returns from the re/insurance market. But in Hampden’s case its Lloyd’s focus and ability to deploy capital into multiple lines of business (insurance or reinsurance) via syndicates gives it flexibility and a way to offset the current price declines seen in U.S. catastrophe reinsurance to some degree.

Some insurance-linked securities managers are finding ways to offset the declines in reinsurance prices and thus returns themselves, either through private transactions or by broadening the geographic or line of business scope of their operations. In the future we will likely see increasing numbers of third-party re/insurance capital management strategies which encompass more lines of business than just catastrophe reinsurance. That will be a positive thing for the market as it seeks to offer a more diverse range of investment options to the capital markets.

Read our article from yesterday: ILS market to continue growing, keep pressure on reinsurance rates.