Retro losses could drive price increases in 2019: Goldman Sachs

Losses faced by the retrocession market could influence reinsurance renewal pricing in 2019, as well as more broadly some lines of insurance, as impacts from recent catastrophe events in 2018 as well as loss creep from 2017 have resulted in a capital event for that niche of the industry, according to analysts.

Goldman Sachs equity analysts expect that events including recent months catastrophe losses in Japan, hurricane Michael’s impacts in Florida and the United States, as well as the continued creep of losses from 2017 events and hurricane Irma in particular, all add up to a capital event for retrocessionaires.

In discussions with reinsurers in Bermuda recently, the analysts found that the retro market outlook is uncertain as the impacts of losses are digested.

The retrocessional reinsurance market has faced some material losses in 2018, particularly from Japan, the analysts explained.

This, on top of the meaningful losses faced from 2017’s hurricanes and catastrophes, means that there have been some capital exits from the retro space, and the analysts cite “weariness” in offering coverage to accounts that have proven particularly loss prone over the lest year or so.

Add in the expectation of some impacts to retro capacity providers from hurricane Michael and the potential for the recent California wildfire outbreak to drive some more losses into the retrocession market, and the level of retro losses faced in 2018 is becoming more significant.

These “capital events” for the retro market may be sufficient to drive up retrocession pricing in 2019, the Goldman Sachs analysts suggest.

This has the potential to increase the pressure to raise rates in some reinsurance and even insurance markets, as the cost of protection at the retro tier rising could mean these higher costs for protection are passed on to each subsequent tiers client base.

Also affecting retrocession market dynamics in 2019 will be demand versus supply.

The accumulation of catastrophe losses through 2017 and now 2018 means that some reinsurance markets are looking to buy more retro protection.

But while demand for retrocession may be slightly up, the analysts expect that supply will not have risen in-line with this and could be flat to slightly down at the January and future renewals in 2019.

As a result, the dynamics of the retrocession market may result in some further opportunities for price support at the least (preventing any further declines), or for price increases in areas and for accounts where losses were particularly severe.

With the retro market relatively compact, in terms of size and number of specialist underwriters, it has always been a market that may move more quickly in terms of price than broader reinsurance.

But in 2019 it seems that supply and demand dynamics, combined with recent loss experience, could provide retrocessionaires (including the collateralized retro players) with another opportunity to harden their rates.