Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Bottom of the soft reinsurance market remains elusive: Fitch


While the rate of decline in reinsurance pricing has been seen to have slowed, the bottom of this soft market remains elusive, as ample traditional and alternative capital continue to weigh, according to Fitch Ratings.

In a report on the Bermuda reinsurance market, in which the rating agency says it remains viable but pressured, Fitch explains that it expects pricing will remain under pressure for the remainder of 2017.

In a warning to reinsurers about the need to reduce their costs, expense ratios and to seek out efficiency, Fitch Ratings says that, with pricing already approaching the cost of reinsurers capital, any further material price drops could result in negative rating actions on Bermuda reinsurance firms.

Alternative capital, and the ongoing growth of insurance-linked securities (ILS) and collateralised reinsurance, continues to apply pressure, as this raises the amount of reinsurance capital affecting the market’s equilibrium.

Of course the fact that ILS and alternative capital is also very efficient, often with a lower cost of capital and lower expense ratios, means that the pressure it applies can feel magnified, resulting in a force which motivates reinsurers to cut their prices further.

This cycle, of lower prices, more efficient ILS capital, more competitive traditional reinsurers, (repeat), has brought us to where we are today, a near low reinsurance pricing environment but with some stability now evident.

The question is whether this stability is now here for the long-run, with prices bumping along, at or near the bottom of the pricing cycle. With alternative capital ready to pour in should there be any sign of prices rising after an event that drains the capital of the traditional market, it’s easy to see why so many call this a new normal.

Despite increased catastrophe losses in 2016, which as we wrote earlier could mean reinsurers use up much of their fourth-quarter cat budgets, demand remains sluggish and no significant growth in the need for reinsurance capacity is currently being seen, despite best efforts from the market.

Fitch sees record levels of capital in both the traditional and alternative reinsurance markets currently and while growth of alternative capital has clearly slowed, it continues to flow into the market as opportunities allow the major ILS fund managers to deploy it.

That seems to happen at almost every renewal, meaning that even though growth is slower alternative capital is increasingly taking share from the traditional reinsurance market at a time when overall demand is not increasing significantly.

Hence the soft market bottom may be somewhere we see pricing sit for quite some time, unless some major event causes a turn in fortunes. But even that turn in fortunes may not result in better prospects for traditional players, meaning that embracing efficiency now to lower the cost of underwriting capital is key.

Finding the absolute bottom of the soft market may be elusive, but reinsurers and ILS players could be forced to get used to hovering just above it.

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