Reinsurance rates to soften more at renewals, demand may increase: KBW

Analysts at Keefe Bruyette & Woods (KBW) have joined the calls for further reinsurance rate declines at the next major renewals, at mid-year 2016 in June and July, highlighting the expected continuation of market pressures but also the possibility for increased demand.

After discussions with insurance and reinsurance industry executives and experts at the 2016 Association of Insurance and Financial Analysts (AIFA) conference, held in Florida recently, analysts at KBW highlighted the continued decline of global reinsurance rates, with more of the same predicted for June/July renewals despite some moderation in declines being seen.

Notably, and as highlighted by a number of industry analysts since the beginning of the year, rate declines in the property catastrophe reinsurance space are seen to be decelerating when compared to previous renewals, as reinsurers look to deploy capacity into less competitive, more attractive business lines, and the entry of third-party capital reduces.

However, KBW analysts’ explain that the “June renewal cycle could once again see pricing pressure, although we expect the size of the decreases to fade.”

KBW’s expectation isn’t too surprising, and numerous industry analysts and experts in recent times have expressed a similar opinion, as absent any significant catastrophe event (with even this possibly not being enough), or substantial change in the overall capitalisation of the reinsurance market, it’s hard to see the market shifting from its softening stance anytime soon.

Ample capacity and heightened competition from both traditional and alternative reinsurance sources, coupled with the benign loss environment continues to drive the supply/demand imbalance occupying the reinsurance market.

However, new regulatory frameworks introduced to the European financial sector on January 1^st 2016, with the implementation of Solvency II and its capital adequacy requirements, could lead to a rise in demand for reinsurance protection as primary and reinsurance players look to optimise their capital.

KBW expands on this point, stating that several reinsurance managements “noted externally driven demand upticks stemming from Solvency II or tougher mortgage insurance capital requirements.”

KBW continued to explain that during mid-year renewals, and with a focus on the Florida property market, after “several years of compounding reinsurance pricing declines, we anticipate increased use of multi-year reinsurance deals during 2016 renewals,” adding that it expects “June 2016 reinsurance renewals to be soft as well.”

In line with recent market commentary, and something we’ve discussed numerous times here at Artemis in recent months, KBW analysts note that despite a decline in the pace of property catastrophe reinsurance rate decreases at 1/1, and the continued slowing predicted at mid-year, the ability to bolster, or mask true underwriting profitability through reserves is thinning, “and will shrink more significantly if catastrophe loss activity normalizes (or ‘above-normalizes’).”

With the international reinsurance market remaining extremely competitive, during 2016 KBW expects “larger reinsurers to compete more heavily for major slices of panels, driving down prices even more – although at a moderating pace.”

Further supporting the expectation of continued declines at the June/July renewal period, but also underlining that some of the smaller players in the space that perhaps aren’t able to compete for larger portions of business might well embark on some form of merger and acquisition (M&A) activity.

“We think smaller reinsurers will continue to join forces to maintain relevance,” said KBW.

With further rate declines expected throughout 2016, moderated or not, reinsurers will need to maintain market discipline now more than ever, and look to position themselves well to be able to capitalise on any uptick in demand.

The April reinsurance renewals which are just around the corner and typically feature diversifying risks in the main in regions such as Asia and Japan, are also expected to see more declines. One broker Artemis spoke with suggested that Japanese pricing for the 1/4 April reinsurance renewal looks depressed, which given the cheap cost of reinsurance capital already in that area suggests further benefits for cedents regionally.

Of course as diversifying peak zones see rates decline further it is making it harder for some ILS players to compete there and also for catastrophe bonds to be issued, as the traditional reinsurance market can leverage its greater ability to discount for diversification in order to maintain its market share.

It will be interesting to see how that dynamic plays out in peak zones like Florida at the mid-year and whether we see any pull-back from either traditional or alternative reinsurance capital side of the market.

Also read:

– Reinsurance rates to continue declines at mid-year: Morgan Stanley.