Capital and capacity is expected to be in abundance at the upcoming mid-year reinsurance renewals, but the management of it is expected to be more conservative, which could help to hold up rates, analysts suggest.
The expectation of an abundance of reinsurance capital from analysts at Keefe, Bruyette & Woods (KBW) is not just because the industry remains well-capitalised.
Neither is it because they anticipate significant fresh capital raising, from traditional or alternative reinsurance sources. While there will be some, from both reinsurer and ILS sides of the market, it is unlikely to be of the levels seen in recent years.
Rather it is because they anticipate that the releasing of some trapped ILS collateral may come into effect, providing a boost to capacity for certain insurance-linked securities (ILS) fund managers and collateralized reinsurance underwriters.
In discussions with ILS market players we’ve been told that some capital may be released in advance of the renewal, as re/insurers that have kept it trapped are in some cases keen to ensure preferred markets have ample collateral available to fill their programs at the renewal.
Clarity is emerging on some re/insurers losses as well, meaning that they can realise the actual size of any reinsurance recovery they are able to make and any remaining collateral can be released. There’s often a concerted push to claw back any available collateral in advance of a renewal and this year may see greater urgency than before.
However, in the grand scheme of one of the biggest reinsurance renewal seasons, any released collateral is not likely to be sufficient to drag down rates, especially not when there is such strong market sentiment for rates to be higher this year.
While abundant levels of reinsurance capital are expected to again be a feature of the mid-year Florida and U.S. renewals, KBW’s analysts note that they “expect alternative capital to be managed more conservatively than during the last two years.”
There have of course been the reports that major players like Nephila Capital and RenaissanceRe have said that they would pull-back from Florida business if rates do not meet their current targets.
But in both of these cases, this has been a message that they have delivered every year in history as underwriting really does have to hit their return requirements. Therefore there’s nothing really new here in 2019 from these players.
The fact those targets may have changed and these leading Florida underwriters want their loss costs covered, may be a more accurate way to portray this dynamic.
More interesting and perhaps more likely to affect capacity levels and pricing in Florida and beyond at the upcoming renewals, is the appetite of the major global re/insurers, the big four European players in particular, as well as any emerging start-up appetite, such as Stephen Catlin’s re/insurer Convex.
The portfolios of these reinsurers are in the main underweight Florida property catastrophe risk. So, any opportunity to secure better pricing there could see these major reinsurers diverting more of their own excess capital into writing a larger book of business in the state and other catastrophe exposed zones.
Of course, this dynamic could lead to some interesting outcomes.
As if the big four Europeans divert more capital to Florida and suppress rate increases (still achieving a rise in prices, but not sufficient for others), the dynamic between traditional and alternative capital in Florida catastrophe programs could become more pronounced, with market share being given up by ILS players.
Hence, discipline is again a keyword for the upcoming renewal season. As we’ve said many times, it will be the least conservative writers of reinsurance at this renewal who could find themselves setting the price.
Leading to a renewal environment that may be less than satisfying for all, as market dynamics and competition look likely to be the biggest potential detractor to price rises in June once again.
The problem here lies in those who underwrite risks at pricing levels that do not cover their costs-of-capital, loss costs and operational expenses, of which there are typically seen to be many.
Until the reinsurance market moves to a more efficient form of placement, where capital and capacity can compete on level terms, expressing its ability to absorb risks based on cost, loss expectation and expenses, we may never see the current dynamic disappear.
At the moment it seems that capital efficiency continues to be held back by market process and procedure, delivering large shares of profits to entities that intermediate transactions in a less-than-efficient manner, which hampers the efficiency of capacity for the underwriting community.
There are signs this will change in years to come, but it won’t happen in a hurry and without pain being felt across the sector as it transitions to a more efficient value-chain where links in it are compensated for the value they demonstrate and provide.
The analysts at KBW do expect loss costs to be taken into account at the renewals though, as distinction between loss-affected and loss-free accounts is expected to be the main driving force for rates.
As a result of this, KBW does expect “higher overall increases” at these mid-year reinsurance renewals, after the two consecutive years of losses.
But after the experience with hurricane Irma, of loss creep, loss adjustment expense inflation and litigation, it would seem prudent to us for even loss-free accounts to face rate rises, unless they can clearly demonstrate that they managed the loss creep and claims inflation significantly better than the market average.
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