Ample upstream capital likely to hold down catastrophe reinsurance prices

Moody’s, the rating agency, has published a report (available here to subscribers to their service) looking at capital levels in the catastrophe reinsurance market and conclude that there is ample capital entering the market so reinsurers are unlikely to see a let up in competition.

Despite the recent catastrophe losses which the market is coming to terms with paying out, Moody’s believe that catastrophe reinsurance prices are likely to be held down by ample capacity. They see capacity levels being reinforced by the entry of new capital upstream in the retrocession market. Retro prices have risen since the disaster filled Q1 (also catastrophe reinsurance prices in affected areas, as evidenced in Australia, New Zealand and Japan) but these prices are likely to stabilise as the market absorbs losses, puts capital to work elsewhere and new capital such as Alterra’s sidecar and CATCo’s capacity becomes available.

Moody’s say that even if new capital doesn’t continue to enter the retro market directly, excess capital from elsewhere in the insurance and reinsurance market can shift upstream to provide additional retrocessional capacity. Retro is particularly important to re/insurers who have seen large dents in their reserves after the events of Q1, especially with the U.S. hurricane season fast approaching. The availability of retro capacity will help reinsurers maintain or even expand their underwriting capacity which Moody’s says will keep the reinsurance market competitive (and should translate into lower price rises than many have been expecting).

Moody’s expects the June/July renewals to be mostly flat with little in the way of price rises for catastrophe reinsurance, although as we have seen recently price rises in areas directly affected by recent disasters have been evident. These prices may slip back closer to levels prior to the disasters but we suspect that it may only take one more major disaster this year to see prices rising across the board. We agree fully with Moody’s when they say that forecasts for the U.S. hurricane season will provide clues on how far reinsurance prices could move, reinsurers will be watching the build up to the windstorm season closely this year and with some trepidation. As a result we hear from some catastrophe bond market participants that the run up to June 1st (the start date of the hurricane season) could see an increase in issuance activity and also some frantic trading in industry loss warranties (ILWs).