Reinsurance margins near pricing tipping point: John Charman

Reinsurance renewal pricing is nearing a floor and the market for catastrophe risks in particular is approaching the point on pricing beyond which underwriters will not go, according to Endurance Specialty Holdings CEO John Charman,

Speaking during the specialty insurance and reinsurance firm’s first-quarter earnings call this week, Charman said that while he expects tough market conditions in reinsurance will continue for a number of quarters, the market in terms of pricing, may be nearing a floor.

“I think we’re at that tipping point where I think so much margin has been given away,” Charman explained. “It’s still a very profitable business, as long as you choose your cedent wisely, but I do believe the margins are getting to a point where the market will push back a bit.”

Charman said that he expects the upcoming key reinsurance renewals in June and July, when much of the Florida property catastrophe business is up for grabs, will be “interesting.” He said that there is some high quality business available which will have differentiated pricing, but it will be interesting to see whether the market reduces its prices by more than single digits.

A double-digit decline in Florida property catastrophe pricing would certainly take pricing down to levels where underwriters will begin to walk away even more than is already being witnessed.

“There is a point beyond which cat underwriters will not go, and I sense the market is moving in that direction,” Charman continued. He added that he cannot speak for the ILS or third-party capital players in the market though, only for the traditional reinsurers.

We’re already seeing the ILS and third-party capital players pushing back on price in recent catastrophe bonds, so it seems unlikely that the ILS market will commit to further steep price reductions on Florida business, unless on accounts where the pricing is differentiated.

And of course someone is picking up the business that is not being renewed by underwriters and ILS players that have been pulling back, so perhaps those players who feel they can continue to write property catastrophe at low prices will support steeper declines at the mid-year renewals.

Charman explained how Endurance sees reinsurance market conditions at the moment; “Within reinsurance conditions remain much more competitive across the board, with short-tail catastrophe exposures facing continued pricing pressures. Longer-tail reinsurance lines, while less competitive, continue to experience some margin compression from higher ceding commissions.”

While Endurance expects the market to “stabilise through the rest of this year” Charman said, the outlook remains challenging. He continued; “Our business plan continues to assume these challenging market conditions will persist for at least the next few years.”

Endurance has been active in non-renewing pressured business where it feels the pricing is inadequate for its needs, as has Montpelier Re, the Bermuda reinsurance firm that Endurance is in the process of buying.

“Despite the price competition our portfolio continues to maintain strong underwriting margins and return potential,” Charman explained.

It will be interesting to see how Charman looks to the Blue Capital ILS and third-party asset manager that has been acquired as part of the Montpelier Re deal as a way to optimise margins further in future.

Endurance has been using increasing amounts of retrocession in recent quarters, but Blue Capital investors could be the beneficiaries of some of that risk in future. That could allow Endurance to extract more profit out of the risk premiums underwritten and perhaps allow it to make its reinsurance margins stretch further.