Rates fall up to 10% at June 1st, “renewed vigour” seen in ILS: JLT Re

Reinsurance renewal rates fell by as much as 10% in places at June 1st 2017, as the market was once again characterised by high levels of capacity and competition, but with the ILS fund market demonstrating a “renewed vigour” as managers looked to increase their shares of major programs.

Reinsurance broker JLT Re once again highlights the competitive dynamic between ILS markets or fully-collateralized and capital markets backed sources of reinsurance capacity and the traditional reinsurer sector, saying that there was “strong competition” seen at the recent renewal.

With reinsurance capital reaching a new record high, by JLT Re’s measure, while opportunities to deploy this capital aren’t growing very fast, if at all, the excess capacity weighed on pricing, and alongside competition for signings resulted in ceding companies being able to achieve improved pricing, terms and conditions on many renewal programs.

JLT Re said that; “Excess capacity and strong competition amongst traditional and insurance-linked securities (ILS) markets, particularly for some of the more sought after placements, were once again instrumental in driving rates down.”

The ILS market has been expansive at this renewal and we are likely to find that overall ILS capital has grown a reasonable amount as ILS funds put more money to work both in the brisk catastrophe bond issuance we’ve seen, but also in taking larger shares of reinsurance programs on a collateralized basis.

“Renewed vigour by ILS markets to deploy capital was notable this year as they looked to increase participations, particularly with stronger performing cedents,” JLT Re explained.

This is a dynamic we’ve been forecasting this year, as it became clear that pricing and appetite for cat bond issuance was going to result in a highly competitive reinsurance renewal, as ILS funds brought their low-cost capital to the market.

This has been borne out in an acceleration in rate declines in the key Florida reinsurance market, with rates down in a range from zero to negative 10%, resulting in an average decline of 5.1% which is higher than the 2016 renewals 3.1% decrease.

It’s the sixth consecutive June 1st renewal to see declining rates, as you can see from the JLT Re’s Risk-Adjusted Florida Property-Catastrophe ROL Index below. As a result pricing for Florida reinsurance business is now around 40% down on 2012 levels and just 10% above the previous cyclical low of 1999/2000.

The JLT Re Risk-Adjusted Florida Property-Catastrophe ROL Index – 1992 to 2017

Bob Betz, Executive Vice President, JLT Re in North America, commented on the June 1st renewals; “While the pace of average rate reductions accelerated at 1 June 2017 compared to last year, the results were very much determined by cedent size and performance. After a difficult 18 months for the Florida insurance market, where attritional losses and mounting litigation related to assignment of benefits (AOB) claims contributed to approximately 40% of state insurers suffering underwriting losses in the first quarter of this year, smaller companies with capital surplus of less than USD 25 million in particular have come under increased rating agency pressure. At a time when markets are focusing on performance, these carriers generally saw less favourable outcomes in both price and reduced line size.”

Adding; “More intense competition for cedents with a stronger track record saw risk-adjusted pricing typically fall within a range of flat to down 10% at 1 June 2017. But even here, results were often layer specific, reflecting historical performance, loss activity and terms and conditions.”

The market for retrocessional reinsurance also saw further declines at the June 1st renewals, with retro programs typically falling by mid-single digit percentages on a risk-adjusted basis.

Demand remained strong and retro buyers continue to take advantage of the highly competitive market conditions to get better pricing and coverage.

“A number of carriers therefore lowered retentions and added additional layers of coverage at 1 June 2017. Others became more specific in their appetites, moving from worldwide covers to Florida only. A number of reinsurers also moved to buy more occurrence coverage and less aggregate cover during the renewal,” JLT Re said.

JLT Re now sees estimated dedicated reinsurance sector capital at a new record of USD 325 billion, up from USD 321 billion at year-end 2016. Premiums only amounted to USD 255 billion at the end of 2016 though, meaning the reinsurance market is “awash with capacity” and supply continues to exceed demand.

Reinsurance Sector Capital and Gross Written Premiums – 1998 to Q1 2017

David Flandro, Global Head of Analytics, JLT Re, explained how this capital glut is affecting the reinsurance market; “Despite elevated loss experiences, reserving volatility, inflationary and interest rate concerns and declining reinsurer returns manifesting so far this year, excess sector capital continues to drive the market. Surplus capacity is enabling cedents to negotiate discounts to expiring reinsurance rates, although renewal outcomes at 1 June 2017 were very much swayed by cedent performance and size.”

Ed Hochberg, Chief Executive Officer, JLT Re in North America, added; “While Hurricane Matthew came close last year, no major hurricane has made landfall in Florida or the United States since Wilma in 2005. The return time of an 11-year stretch without a major hurricane landfall across the US coastline is in excess of 300 years, reminding us that such good fortune cannot go on forever. In fact, some forecasts now indicate the 2017 North Atlantic hurricane season could see above average activity. After six consecutive years of falling pricing, reinsurance currently offers an extremely efficient form of capital. Carriers with the foresight to utilise today’s cost effective reinsurance can help secure future profitability by preparing for the next market changing event(s).”

The June reinsurance renewal has been another wake up call for the reinsurance market, particularly those who as much as a year ago were calling for the market pricing floor to be fast approaching.

That has now proven to be wishful thinking and the prospects for the July and later renewals this year and even the January 2018 renewals are likely to be further declines, albeit limited given how low we are in the pricing cycle right now.

The ILS market has clearly demonstrated its capital efficiency in recent weeks and at this renewal. It will be interesting to understand just how much it has grown its share in Florida and other key markets as a result, as well as to see which ILS managers have been able to bring in new allocations from investors to support their appetite for more risk.

Catch up on all our reinsurance renewal coverage here.

Join Artemis in Singapore on July 13th 2017 for ILS Asia, tickets on sale here