With the mid-year reinsurance renewals only just behind us and reports suggesting reinsurance rates were down anywhere from -5% to -20%, already people begin to look to the next major renewal period at January 1 2015.
The reinsurance market remains cyclical in nature, at least in terms of the renewal cycles, with major programs and treaties renewed at key market junctures during the year. In the last 18 months almost every reinsurance renewal has seen rates softening, as prices declined due to excess capacity and high levels of competition.
Reinsurance market observers and analysts have been wondering for some time just what it might take to change the markets pricing direction. Earlier today we published a piece where Aon Benfield said it believes a $100 billion loss (at least) is required in order for prices to move back up even a little bit.
That seems to be the general opinion in the market as well, that a major loss of that size is required. Alternatively a number of large $20 billion+ losses in a single year could prove attritional enough to result in some reversal of the reinsurance market softening.
Of course major catastrophe loss events can, unfortunately, occur at any time. But while the world remains relatively free of large, costly weather and natural disasters in the last year or so the pressure on reinsurance market pricing is destined to continue.
Analysts at Barclays said in their latest report that if the reinsurance market remains free of major catastrophe losses for the rest of 2014 they expect reinsurance rate declines in the order of -15% in 2015. Added to rate declines seen this year and in 2013 that would mean some property catastrophe rates in 2015 may be as much as -50% to -60% down over a two-year period.
This is what Aon Benfield means with its ‘lowest risk margins in a generation‘ statement. The reinsurance market is heading to a point where pricing will no longer be sufficient for some underwriters to maintain their cost of capital, making lower cost capital markets money and insurance-linked securities (ILS) even more likely to flourish.
This also puts pressure on traditional reinsurers to leverage third-party capital themselves, to gain a source of lower cost underwriting capacity with which they can begin to at least compete on even terms with new entrants and others already embracing third-party capital.
Barclays notes that the influx of capital from ILS and third-party investor sources is one factor, but also that reinsurers are partly responsible for chasing down prices themselves. This marries with comments from some brokers who have suggested that traditional reinsurers desperate to maintain premium levels are themselves responsible for much of the more recent price declines and definitely for the relaxation of policy terms and conditions.
So the perfect storm of capital, competition and no major catastrophe losses continues. Some reinsurers will be hoping that the forecasts for a benign hurricane season prove inaccurate, as a number of storms impacting the U.S. coastline could easily see losses start to mount (see Arthur).
Whether that would be enough, even at over $100 billion of insured industry loss, to reverse the current softening trend remains to be seen.