Expectation of higher reinsurance rates is rising, especially retro

The expectation that reinsurance & ILS rates will increase at the forthcoming January renewals is rising, as execs in the sector digest losses they face and the impact of trapped ILS collateral. The highest rate rises are anticipated in retrocession markets, as a significant chunk of retro capacity is assumed to be either paying out or locked in.

As the ramifications of the recent catastrophe events and the aggregation of losses across them sinks in, an increasing number of calls for price increases are being heard, from both the traditional and alternative sides of the industry.

Among the quickest to call for rate increases were the ILS fund managers, many of whom immediately knew that they faced trapping of collateral and as a result expect to be able to earn a higher return on replacing it, or deploying new capacity raised from investors.

The traditional market is also aware of the need for higher rates and it’s beginning to feel like some senior executives are looking for something quite substantial in terms of price rises at January and beyond.

Part of the reason for this seems to be a realisation that property catastrophe rates have been, in certain cases, too low over the last year, that the soft market may have softened too far.

We’re also hearing from sources that, combined with this feeling that rates had got too soft, is a belief that too much coverage has been given away as well. This could bring terms and conditions into focus once again, but for the right reasons of ensuring coverage pricing is commensurate with the risks assumed, rather than extras being given away to win business as has been seen of late.

Is this a sign of discipline returning to the reinsurance market, or just wishful thinking from beleaguered reinsurance firms? It remains to be seen.

Analysts have suggested rate increases, at least on property catastrophe programs in the United States and Caribbean, of anywhere from 10% and upwards.

Some suggest this will be on loss hit accounts and regions only, with others expecting something broader in terms of uplift.

In the retrocession market there are expectations of larger rate increases, due to the fact a significant amount of collateralized retro capacity is expected to be trapped while losses are assessed and that a lot of traditional retro capacity will be at-risk of paying out following recent hurricane events.

One industry source suggested that as much as 50% of the retrocession capacity that renews in January is likely either facing a loss or trapped, of collateralized retro the percentage is assumed over 65%. That’s a significant chunk of the market and bound to result in price increases at 1/1.

Retro specialist Markel CATCo said just the other day that, the recent catastrophe losses, “Have resulted in increased pricing within the retrocessional reinsurance market.”

Other collateralized retro players have said they expect the same, while ILW capacity specialists are also anticipating rate increases and rising demand as well.

Some companies are expecting broader price rises across the re/insurance sector, as a result of the heavy third-quarter loss burden.

Hiscox CEO, Bronek Masojada, explained recently, “These events are already having an impact on rates in the global insurance market, particularly in affected areas and specific sectors.  After a number of years of rate reductions, we are starting to see price corrections, most acutely in affected lines such as large property insurance and catastrophe reinsurance, which we expect to spread to non-affected lines.”

Analysts largely agree that the biggest rate rises are likely in retrocession markets, due to the potential for trapped collateral from ILS players and large losses to retro capacity after the aggregation of recent catastrophe events is factored in.

So if rate rises of around 10% to as much as 20% are expected on loss affected property catastrophe reinsurance accounts, retrocession markets could see more meaningful increases of 20% or more.

The question is how short-lived any rate rises are and whether excess capacity dampens the potential for them to become more permanent.

As we wrote earlier today in a piece on catastrophe bond investors expectations for higher yields going forwards, the appetite of ILS and cat bond investors to gain higher rates in the future will have a significant bearing on how long any reinsurance market hardening persists.

If reinsurance markets look for 20%, but cat bond and ILS investors accept 10% it will reduce the ability of the traditional market to get paid back, while providing the ILS market with an opportunity to gain market-share through larger transactions and perhaps new sponsors.

But what will really help reinsurance markets would be  the enforcement of a pricing floor, so even if prices go up for a short time when they come back down it is not quite to the levels we have seen this year.

Both traditional and alternative or ILS markets seem to want this, being aware that too much may have been given away on certain programs in recent years.

It may take some time for the full extent of recent losses to be understood, but already it seems the market is keen for the next soft reinsurance market (or simply the future of reinsurance pricing) not to be as soft as it is today.