Demand for reinsurance capacity has increased at the latest January 1st renewal season, but the much discussed pricing floor has yet to become evident, as steady and continued reinsurance price declines at upcoming renewals are forecast by some of the market.
At a recent conference, CEO’s and senior executives from largely Bermudian reinsurance firms explained that a slight uptick in demand for protection was noticed at 1/1, with opportunistic and unmet sources driving the increase.
Mortgage risk is one clear driver of new demand that has come to the reinsurance market over recent renewals, but FEMA’s flood risk is another source that helped to drive greater capacity deployment, as was some state risk pools buying more reinsurance, according to analysts Keefe, Bruyette & Woods, who attended the AIFA event.
The panelists agreed that there remains a margin in the reinsurance industry, as they questioned statements from those such as Warren Buffett who talk down the industries returns.
KBW’s analysts say that reinsurers now seem to expect that price declines are set to continue, rather than the much-anticipated pricing floor which appears to remain elusive.
While there is margin and return available in the reinsurance business, a steady and continued decline, albeit at a slow rate, is the most likely outcome over the next renewal or two. Perhaps after January 2018 the market may be closer to a floor, but right now and based on where catastrophe bond pricing has declined to, it seems likely that traditional reinsurance rates are set to decline further at the key June and July renewal this year.
Commercial insurance pricing is anticipated to keep falling at a faster rate, the event heard, and the analysts said they expect this will need to fall to unprofitable levels before any change is seen.
That could make the pressure on reinsurance pricing persist further as well, as commercial insurers push for reductions to make their protection affordable when their own premium rates are dropping. Of course it could also have a further demand effect, as some commercial insurers may look to greater use of reinsurance capital to support their less profitable underwriting.
Activities that shift outside of traditional reinsurance, capital deployment and mergers & acquisitions are expected to remain a focus, according to KBW, as reinsurers look to execute build vs buy strategies for growth.
Higher returns are becoming increasingly hard to source, no matter what capital is used, meaning that creating new avenues to source risk, niches that can be underwritten, primary arms, specialisms and ways to get paid for underwriting and pricing expertise, are all expected to become more urgent.
Reinsurance price decreases, albeit at decelerating rates, are expected to benefit the Florida property insurance market again at June renewals, KBW’s analysts say, although impacts to primary rates in the state from the assignment of benefits (AOB) issues could flow through in future years.
Panelists discussing the reinsurance market at the event said that pension funds definitely view insurance risk as an asset class, which suggests no let up in the pressure created by alternative capital from the capital markets.
However, panelists at the event also said that no single capacity source is expected to dominate, as someone will still need to source or underwrite the risks and pay the claims.
Which of course is where reinsurers can extract fee income from business that no longer has returns that meet their cost-of-capital, by providing underwriting or claims management services to business underwritten using third-party capital sources.
Soft reinsurance rates are also assisting reinsurers, of course, as attractively priced retrocession is helping them to maintain shares in markets that may otherwise have been deemed lacking in margin.
Alternative capital is also helping in this respect, enabling reinsurers to maintain underwriting volumes in markets where their own capital is no longer efficient, with third-party investors able to capitalise on access to risk and underwriting expertise from the largest reinsurance firms around.
While rates keep declining this trend is likely to continue and increase, ultimately raising the volume of capital market and alternative capital in reinsurance, while also resulting in an increasing desire to launch sidecars, special purpose insurance vehicles and total-return strategies, that all enable a reinsurer to replace direct underwriting premium income with underwriting fee income.
The pricing floor is likely to remain elusive for some time to come across the industry, although some pockets of loss or reserve affected reinsurance lines could fluctuate, UK motor one example after the much discussed Ogden Rate change.
But in core lines such as property catastrophe risks, specialty risks like energy and marine, casualty lines and other market staples, the general trend will be towards ongoing softness, albeit at the much decelerated rate of decline it appears.
It will be interesting to see how property catastrophe reinsurance rates react at the mid-year June and July renewals, as U.S. rate pressure could pick up if reinsurers look to catastrophe bonds for a marker of returns.
With recent catastrophe bond issues all pricing downwards, it looks like the ILS market has decided that it can take another margin cut on these top-layer type catastrophe risks, which may not bode well for reinsurers who are still hunting for the floor.