Capital availability & losses to drive reinsurance rates at 1/1 renewals

Reinsurance, retrocession and insurance-linked securities (ILS) market sources expect rates to remain stable or even harden at the upcoming January 1st renewal season, as the loss experience and creep from 2017 catastrophes and the growing impacts from 2018 events look set to slow capital expansion across the sector.

After the major losses of 2017, the reinsurance and ILS market entered 2018 with even more capital than prior to the hurricanes forming.

Capital raising in the ILS space and the continued glut of excess capital in the traditional market helped to boost the ability of underwriters to continue accepting risk with little in the way of post-loss price increases.

Price increases were seen in regions and programs that were particularly badly hit by the 2017 hurricanes and other catastrophes, but generally the market was flat to even slightly down, a pricing trend that continued at the mid-year 2018 reinsurance renewals when rate momentum decelerated once again.

But a number of major losses in recent months may prove enough to strengthen the resolve of the sector, especially when added to the continued 2017 loss creep largely from hurricane Irma, we understand.

Catastrophe events including those seen in Japan (typhoon’s Jebi, Trami, the July extreme rainfall and flooding), hurricanes Florence and Michael in the United States, as well as the latest California wildfire outbreak, are set to drive tens of billions of additional industry losses between them, with reinsurance, ILS and retrocession markets all being hit.

As a result the ILS sector is seeing collateral trapped on exposed contracts for the second year in succession, the first time the ILS market has ever experienced this to such a significant degree.

Retrocession markets (traditional and ILS) have been particularly affected by the multiple losses and on the collateralized retro side by this trapping of collateral, resulting in a squeeze expected for some in this marketplace.

While for ILS funds that invest across collateralized reinsurance, private ILS contracts, private quota shares and other bi-lateral transactions, some are facing entering 2019 with large side-pockets in place, to segregate and trap the potentially affected collateral related to their exposed contracts.

As a result, the ability of markets to raise fresh capital from existing backers is set to be tested and there could be a capital and capacity crunch for some, if they’re unable to replenish in time for the renewals, both on the ILS fund and traditional sides of the market.

We’re also hearing that some markets may not look to replenish all trapped capacity in time for the renewals at all, preferring to let the current situation of multiple side-pocketed assets play out in order to see what can be released at a future date.

The result is expected to be that a number of ILS fund and collateralized retro markets may go into the January 2019 reinsurance renewals with less capital than they had a year ago, thanks to the impact of two successive years where collateral has been trapped following these global catastrophe events.

While this may not shrink the market overall, as we know of plenty of others out raising fresh capital as we speak and the number of initiatives that will mobilise third-party capital through sidecars and managed vehicles will increase again for 1/1, there is a good chance that ILS market growth overall may stall for a period, while managers work through the impact of this successive years of losses.

At the same time, we’re hearing that some markets (again both traditional and alternative) are pushing for significant rate increases, as they look to secure the pay-back that perhaps should have been delivered following the prior year of losses.

But now the 2018 losses have strengthened those calls, we understand, resulting in a more concerted effort by some to secure better rates at the upcoming renewal season.

Artemis spoke with Luca Albertini, CEO of ILS investment specialist Leadenhall Capital Partners, who said that the outlook is for a generally stable market, from a capital point of view, but suggested to expect some changes as to where that capital comes from and who it is deployed through.

“We expect capacity at this renewal to be generally stable, with some investors reallocating and new investors allocating more to lower risk strategies,” Albertini explained.

We understand some ILS funds have been receiving redemption requests from investors, for whom two consecutive years of losses has perhaps been too much, resulting in some shifting of the investor base in ILS and

Continuing, “The key question (not yet fully answered) is the extent of fresh capital trapping, which can further reduce capacity at the riskier layers level and for funds focused on retrocession.

“We believe that between some of the creep on 2017 losses, 2018 loss activity and stable capacity there is scope both for improved pricing and renewal terms and we are working towards these goals.”

At the same time Leadenhall is closely looking at the performance of accounts and programs they allocate capital to as another directional input to pricing and underwriting decisions for the upcoming renewals.

Albertini explained, “We have also monitored buyers’ behaviour and loss experience in the past few months and this is leading to some relationships being reconsidered and business being potentially discontinued as part of our annual portfolio review process.”

There is a general feeling that the ILS market, as well as traditional reinsurance markets, will be seeking at least stability in rates at 1/1, if not some hardening.

In retrocession markets the renewal discussions have moved towards a focus on rate increases, we’re told, as this segment appears set to experience a capacity crunch of sorts that could help in pushing through price rises.

At the same time, those markets (retro and reinsurance) that have already negotiated some of their renewals early on are largely re-negotiating now, where they can as it’s not always possible unless stated in the terms, in order to ensure that the latest losses have been factored into pricing of capacity for the January renewal period.

This makes the actions of French reinsurer SCOR, which renewed its program at the beginning of Q3 before the impact of the wildfires hit the market, look a very shrewd move.

Availability of capital, the impact of trapped collateral and the ultimate amount of losses faced are all set to be key drivers for the outcome of January 2019 renewals across both reinsurance and retrocession markets.

But visibility of precisely where the losses will ultimately fall is still lacking, especially with the California wildfires so recent, typhoon Jebi’s market loss still creeping higher and the impacts of hurricane Irma from 2017 still uncertain as well.

This makes setting prices for 2019 especially challenging for some, particularly in the retrocession space where losses sit a tier above the reinsurance market and so data to derive where they fall may take longer to be provided.

As a result of all of this, the January 2019 renewal may be one of those renewals where finalisation of allocations to programs will happen very late in the day.

Whether we’ll see another renewal where people are scrambling to get their coverage finalised and signed for 1/1 remains to be seen.

But it is almost certain that, as these market forces drive the pricing and risk appetite for the renewals, it will be a very busy December for the market overall and some are guaranteed to be working through their Christmas break in order to be ready for January 1st.