Changed view of risk to help rate increases persist into 2020: KBW

Reinsurance rate increases seen so far in 2019 are now expected to persist into 2020, according to analysts at Keefe, Bruyette & Woods (KBW), who believe that the increases are being driven by capital providers changing view of the risks they underwrite.

Following the last two year’s of catastrophe losses, reinsurance capital providers on both the traditional and ILS fund sides of the market are hoping that the market may have installed and be able to enforce a new floor for pricing.

In recent years, any stability in rates has quickly given way to further softening as excess capital and capacity continued to build in reinsurance and the ILS fund market.

But now, following the complex and persistent losses of the last two year’s, the market is more hopeful of being able to hold-firm on the price increases seen so far in 2019, enabling the floor to be lifted and better rates to also be available at the key January 2020 renewal season.

KBW said recently that the all-important June 1st reinsurance renewals in Florida were likely to see rates increase by on average the mid-teens, although with significant variability across the market depending on ceding company performance and loss experience.

During their visit to Bermuda, the KBW analysts found that both reinsurance and ILS market professionals are hopeful that rate rises will prove persistent.

A number of factors are expected to assist the reinsurance and ILS markets in their goal of holding up rates.

The fact retrocession capacity remains dented is a key factor here, as the availability of cheaper retro has helped reinsurers to be more adventurous in their underwriting in recent years, which ultimately helped traditional firms be more competitive versus alternative capital as well.

In addition, the ILS fund market has not been raising significant amounts of new capital in 2019 so far, which means we haven’t seen a glut of new capacity emerge needing to be deployed.

At the same time, the major European reinsurers have (so far) not rushed in to offer lower pricing and to build up their underwriting books in Florida and other peak catastrophe zones, something that always threatens to soften rates.

But overarching all of these factors is the desire of underwriters, traditional and ILS, to be paid more commensurate with the loss experience they have suffered in recent years, leading to a much more aligned view of the need to boost rates being held across the reinsurance and ILS market.

KBW’s analysts attribute this greater alignment on pricing to “capital providers’ changing view of risk after two years of significant catastrophe losses including material loss creep.”

The impacts from hurricanes Irma, typhoon Jebi, hurricane Michael and then the relatively un (or under) modelled California wildfires, have changed the perception of risk among many.

Or at least changed the perception (perhaps expectation) of where expected loss costs should really sit for these perils in an ever-changing and more complex world.

As we’ve said numerous times, reinsurance rates need to cover cost-of-capital, expenses and loss costs over the longer-term.

With loss costs clearly not having been covered for these recent catastrophe events, it seems the market is finally adapting to integrate the new view of loss cost potential into its pricing expectations.

In addition, the fact the reinsurance and ILS market is not applying this in a completely broad-brush manner is encouraging, as the differentiation of rates for ceding companies based on performance, loss experience and their ability to stem (and provide timely information on) loss creep is a much more healthy way to firm up the market, without affecting the demand side unduly.

As a result, “The executives we met expect at least one full year of sustained increases, implying rising reinsurance rates at both the July 1, 2019 and January 1, 2020 renewals,” KBW’s analysts said of their Bermuda trip.

However, the analysts also said that “the current rate increases aren’t exciting enough to attract significant new capacity.”

This could be proven wrong though, as there is new capacity actively looking at the market now and thinking rates are adequate for its entry. We feel it’s more about timing, as new capital would like to see how the market functions at this mid-year renewal juncture, before deciding on exactly how and when to enter (or upsize).

Clearly, loss experience in 2019 is going to be a factor in how rates move at January 2020, although encouragingly KBW’s analysts believe that even a “low-loss 2019 would probably only partly unwind current rate increases.”

Of course there remains a long way to go to January 2020, but as the mid-year renewals pass and summer reflection begins, it’s likely we’ll see a reinsurance and ILS market that is relatively determined to hold onto the pricing gains it has achieved when we move into the end of summer and autumn conference season.

Another set of analysts from Goldman Sachs also said recently that pricing increases could be seen right through to April 2020, but without further losses in the U.S. it is unlikely the princing floor can be sustained at the June 2020 renewals.

It looks like the floor on pricing is what we’re searching for, rather than the rate of increase of pricing, as given the ebb and flow of losses and capacity it’s always likely that the increases will pare back somewhat in time.

Hence it’s the emergence of a new pricing floor, particularly in a time of fewer major catastrophe losses, that will provide the evidence required to prove that the reinsurance and ILS market has really adjusted its view of the risks underwritten and to get to that stage we may need to see catastrophe models adjusted upwards first.

Read all of our coverage of the reinsurance renewal seasons here.

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