Catastrophe reinsurance prices could fall below technical hurdles in 2015: Moody’s

Technical pricing on catastrophe reinsurance renewals may fall below reinsurers technical minimum pricing levels at the 2015 renewals, if the current price softening trend continues, according to rating agency Moody’s Investors Service.

Catastrophe reinsurance prices, particularly across the United States and Florida, have been the most affected by recent reinsurance market softening. The lack of recent major loss events combined with a well-capitalised primary reinsurance market and growing alternative reinsurance inflows have pressured rates, but at this time technical pricing remains above or at the technical levels required for profitability.

Moody’s Vice President and Senior Analyst of the Global Insurance Group David Masters, wrote in an update; “In absolute terms, catastrophe pricing in Japan and the United States remains above reinsurers’ minimum technical price, such that even with the current rate reductions, as of today Japanese catastrophe business still remains a profitable line of business, as does the US market, albeit to a lesser extent.”

This was written just before the mid-year reinsurance renewals, which saw further price declines particularly across Florida and U.S. catastrophe business. Price declines at the June 1 renewals were said to be as high as 15% to 25% and the July 1 renewals are expected to also see a softening trend, although given recent catastrophe bond pricing trends we may see rates hold up better.

Masters had taken the potential for further price declines into account when writing his analysis, saying; “Even allowing for the expected rate reductions at 1/6 and 1/7, we anticipate reinsurers will still exceed their minimum technical price levels.”

So that should mean that catastrophe reinsurance business continues to be profitable for reinsurers through the rest of the year. However it is if this price softening continues that technical hurdles, the level were underwriting is considered profitable still, may not be reached anymore.

This would be particularly true for catastrophe focused reinsurers who likely participate in the areas of the market which are most competitive and where the price declines have been steepest to date. If your whole business relies on technical profitability from catastrophe reinsurance and nothing else it could become testing if the current market conditions persist.

Masters wrote; “Should the situation persist, we anticipate reinsurers will steadily reduce their exposure to catastrophe lines through the 2015 renewals as renewal prices are likely to begin falling below technical hurdle rates.”

So essentially, if the softening reinsurance market environment persists through to the January renewals, we could see catastrophe reinsurance business which can no longer be underwritten profitably by certain traditional reinsurers operating with balance sheet capital.

Of course, that’s not to say that this same catastrophe reinsurance business will not meet the technical hurdle requirements of third-party reinsurance capital and insurance-linked securities (ILS). The lower-cost of ILS and third-party capital could mean that rates remain at these lows as the capital markets and reinsurers with capital markets units soak up business once the sole domain of the traditional reinsurance balance sheet driven market.

We’re a long way and a whole hurricane season off seeing catastrophe reinsurance pricing fall below technical pricing levels and it is by no means guaranteed to happen anyway. However this must be a fear that every catastrophe focused reinsurer CEO, without a strategy for embracing third-party capital or line of business diversification, finds is keeping them awake at night.