Global asset management group Schroders observed a mixed outcome at the January 1st, 2018 renewals, with insurance-linked securities (ILS) business experiencing lower-than-anticipated rate increases across all lines, according to Dirk Lohmann, CEO of Secquaero Advisors AG and Daniel Ineichen, Head of ILS Portfolio Management at Schroders.
In a recent webcast, the pair discussed the performance and response of the ILS, or alternative reinsurance market at the January 2018 renewals, in light of the devastating impacts of third and fourth-quarter 2017 catastrophe events. Secquaero Advisors acts as exclusive investment advisor on structuring, origination and other matters to Schroders in its ILS business.
Lohmann explained that it was largely an orderly market at renewals, and while it was late there wasn’t any signs of a disrupted or distorted market, despite the huge level of global catastrophe losses assumed by the insurance and reinsurance industry.
While the firm witnessed rate increases across numerous business lines at 1/1, the improvements weren’t as positive as expected, something noted by a number of re/insurance and ILS market participants in the weeks following the renewals season.
Interestingly, as part of the webcast the pair provided a breakdown of projected versus observed rate increases, which reveals that why all types of business did witness some positive rate movement, in each case, this was less than expected.
Schroders rate increase projection at the end of October, 2017 for loss impacted retrocession was +35% to 50%, and +10% to 20% for loss free retrocession. However, as at the end of December, 2017 loss impacted retrocession achieved a +15% to 30% increase, while loss free retrocession achieved a +5% to 15% increase.
The firm projected U.S. loss impacted business, excluding Florida, to increase by +30 to 50%, and U.S. loss free business, excluding Florida, to increase by +10% to 20%. However, increases achieved were +15% to 35% and +5% to 10%, respectively, as at the end of December, 2017.
And the trend continued outside of the U.S. and the retro arena, with Schroders projecting European loss free business to increase by +5% to 10%, when in fact it achieved a +0% to 10% increase. New Zealand / Australia business was projected to increase by +10% to 25%, when in fact it achieved a +2.5% to 20% increase.
So, clearly rates increased across all business types noted by Schroders in its webcast, albeit by not as much as was projected, which, Lohmann and Ineichen provide some thoughts on what might have influenced the muted price response.
During the webcast Lohmann underlined a number of negatives for price dynamics at the January renewals, which he said included the updated catastrophe model from RMS, which ultimately resulted in lower modelled expected losses or certain U.S. perils, offsetting upward pricing pressure.
Furthermore, loss estimates for Harvey and Irma for numerous firms declined during the renewal season, which actually resulted in less trapped collateral than was expected, with “reduced squeeze on retrocessional pricing.”
At the same time, Lohmann noted strong demand for higher yielding transactions and that some were chasing coupons in the 12% to 15% area, which combined with the above and the ability of ILS capital to reload in time for renewals, all served as negatives for pricing dynamics at 1/1.
Prices in the market are expected to continue to improve (year-on-year) throughout 2018, with many now looking to the mid-year renewals season, but the influence and abundance of ILS capital along with the well capitalised and competitive traditional market have certainly helped to flatten down the pricing peaks.