Absent further major losses hitting global reinsurance and insurance-linked securities (ILS) markets this year, the expectation now is that rates are likely to lose any ground gained at renewals so far this year and return to a slow softening trend in 2019, according to analysts at Deutsche Bank.
It’s no surprise really, given rate increases have decelerated again at the recent June 1st reinsurance renewal, with only loss affected accounts seeing any meaningful rises.
The gains made in January, as rates rose somewhat, were below the expectations of the traditional market at least, but these gains could be lost within a year if there isn’t a loss event that drains some of the capital from the marketplace.
Deutsche Bank’s equity analysts say that “the reinsurance pricing outlook looks very bleak” as a result, with an expectation that the market may not see any further rate increases to improve on those achieved so far in 2018.
They suggest that reinsurers which have touted the potential to improve their underwriting profitability in 2018 and beyond, on the back of the major losses from 2017, may now find that they and their shareholders are set to be further disappointed, absent any major industry losses.
The big four reinsurers have all expressed a desire to increase profitability over the coming years, not just due to better pricing after the losses but also thanks to greater efficiency.
In fact some of their targets imply improving underwriting returns at a level that some analysts are suggesting would require significant cuts to achieve.
Those efficiency efforts may become more urgent, as premiums earned in 2018 may be about the best they can hope for having mostly bulked up their property portfolios at January renewals this year.
Once those rate increases are earned through, there could be little in the way of increases left as pricing returns to a slow and steady decline.
If re/insurers efficiency efforts, such as headcount reduction and technology initiatives, aren’t seen to improve the bottom line swiftly enough, we could see them accelerated in order to make more immediate impact for their shareholders and to lower their overall cost bases.
Deutsche Bank’s analysts say they see clouds on the pricing horizon for the market, explaining that at the firms recent conference the reinsurers almost all said that their pricing expectations for the mid-year renewals had been toned down during the course of the renewal process, as it became clear the hoped for increases would not be achieved.
Even the loss affected account price increases have been seen as insufficient to make a material difference to pricing across renewal portfolios this year.
Reinsurers have all pointed to underwriting more business outside U.S. catastrophe risks, particularly in casualty, where they also saw some improvements in rating.
The analysts say that they now expect the overall 2018 price increases in reinsurance to be smaller than had originally been anticipated after last years losses, with a 1% to 2% overall price rise about the best the market can hope for.
As a result, 2019 is likely to see price deteriorate if the catastrophe loss levels this year are within expectations, as the “clearly dampened momentum” of rates and the softened price dynamics become evident once again.
If prices begin to soften once again the analysts also believe that some of the big reinsurers will have to start to tone down their premium expansion efforts, as pricing is not going to meet their return requirements. However big quota share deals could continue to distort this somewhat, especially as smaller companies look to the big reinsurers for capital support.
Overall the pricing outlook looks gloomy for some, as long as capital remains abundant and pricing muted, with competition still seemingly increasing all the time in property catastrophe risks.
We say gloomy for some, as there are ways to maximise the margins on underwritten catastrophe exposed property risks, something that the major reinsurers and also ILS players are set to increase their focus on, by capturing the risk linked returns as close to the source and as directly as possible.