Declining reinsurance prices a credit negative for reinsurers: Moody’s

Price reductions seen across most lines of reinsurance business at the January renewals this year are a credit negative factor in the outlook for reinsurers, according to a report from ratings agency Moody’s.

Declining prices across the reinsurance market, as reported by leading reinsurance brokers Guy Carpenter, Aon Benfield and Willis Re in their respective reinsurance renewal reports, are a credit negative for reinsurers as it will put additional pressure on reinsurance underwriting profitability and margins in 2014, said Moody’s.

Property catastrophe pricing saw the most notable falls, with Guy Carpenter’s Global Property Catastrophe Reinsurance Rate-On-Line index falling by 11%, but now these declining prices are spilling over into other lines of business. Moody’s says that these credit negative developments are primarily the result of excess capacity and the benign 2013 hurricane season.

Moody’s notes that despite the reinsurance sector-wide trend for declining rates, pricing by reinsurer can vary widely. The upcoming reporting season, beginning in February should provide an opportunity for analysts and others to see exactly who has been most affected by the reductions in reinsurance pricing.

Moody’s notes reported U.S. property catastrophe rate declines of 10% to 25%, depending on which broker report you refer to, and quoted declines on European and international reinsurance renewals in the range of 10% to 15%.

Interestingly, Moody’s refers to the ‘relaxing of terms and conditions’, which has been talked up to some extent by brokers as a positive sign of reinsurers being more flexible, as a deterioration of underwriting quality, citing the hours clause and terrorism cover broadening as examples.

As Artemis suggested in coverage of the brokers renewal reports (here and here) reinsurers are at risk of giving away too much through this relaxation or expansion of terms. It’s interesting that some market participants were suggesting that underwriting discipline was lacking in ILS and third-party reinsurance capital through much of 2013, now in 2014 the same is being suggested of reinsurance firms.

The takeaway here is that underwriting diligence is absolutely key in the current reinsurance market environment and product innovation is a much better approach to retaining customers, as well as winning new ones, than giving something away for nothing.

The buyers market at the January reinsurance renewals has emerged due to well-capitalised traditional reinsurers helped by the benign hurricane season and the increasing levels of alternative and third-party reinsurance capital which have flowed into the sector.

While not every reinsurer is focused on property catastrophe reinsurance business, typically it accounts for only 10% to 15% of a diversified reinsurers total premiums, it is traditionally the most profitable line of business. The difference is vast though, between property catastrophe focused players with as much as 70% of premiums coming from that line down to globally diverse reinsurers with less than 5% of premiums coming from prop-cat.

So the impact will be varied, but with reinsurance price reductions now spilling over into other lines of business Moody’s suggests that the impact will be noticeable come company reporting time.

While the market remains free of meaningful catastrophe losses Moody’s expects the supply demand imbalance in the reinsurance sector will continue to be an issue, perhaps resulting on persistent pressure on rates. Traditional reinsurers remain well-capitalised and institutional investor appetite for catastrophe bonds, insurance-linked securities and other forms of alternative reinsurance investments remains strong.

At the same time Moody’s notes the tepid demand for reinsurance protection, which does not appear to be growing and may in fact be shrinking at the moment.

Moody’s expects that the January reinsurance renewal pricing will have set the tone for the rest of the major renewal periods through 2014, suggesting that the April Asia-Pacific renewals and June/July U.S. renewals may see further price reductions available.

Moody’s remains pessimistic for reinsurers growth prospects and clearly sees the current market environment as increasingly challenging, for as long as the market remains free of large enough losses to turn pricing. Moody’s recently also said that it felt that the growing catastrophe bond market is a credit negative for reinsurers.

Read more of our January 2014 reinsurance renewal coverage:

– Guy Carpenter: Capital, convergence, competition = reinsurance renewal rates fall

– Aon Benfield: Buyers market at January reinsurance renewals

– Reinsurance price softening broadens, overcapacity continues: Willis Re

– $10 billion of new third-party reinsurance capital in 2013: Guy Carpenter