Firmer than expected reinsurance rates can hold: Berenberg

Reinsurance market pricing is firming up slightly more than had been expected, while reinsurance market forces also suggest that the rate rises seen so far can hold, according to Berenberg’s analysts.

The persistence or otherwise of any rate gains achieved at the reinsurance renewals so far in 2019 are a hot topic of conversation right now.

Underwriters and risk capital providers, both traditional and from the ILS market, hope that there can be some persistence in the rate firming already soon.

The hope is for further firming at the January 2020 reinsurance renewals, or at the very least rate stability enabling capacity to achieve a higher return for more than just a single renewal cycle.

Analysts at investment bank Berenberg believe that the rate increases seen can prove sticky, as market forces suggest the firming can be more persistent than seen in years, suggesting good prospects for future renewals.

The analysts cite increased discipline from traditional reinsurance market players after two significant catastrophe loss years, a crunch on capacity in the insurance-linked security (ILS) market, uncertainty on the strength of cedant’s reserves following hurricane Irma related loss creep issues, and the loss of access to cheap retrocessional capacity, as all set to play into the ability of rate rises to persist.

Leading them to state, “We do not see these factors reversing materially in the short term. As such, we believe the rate rises can hold.”

The recent move in pricing, “suggests the market firming is slightly stronger than we had expected,” the analysts wrote, adding that this supports their positive outlook for the segment at this time.

A lack of fresh ILS capacity inflows at the renewals has helped in this regard which, with ILS funds remaining on the hook for potential losses to trapped capital, while ILS investors adopt a wait and see approach after two year’s of loss impacts, is no real surprise and actually reflects the current discipline across the sector.

ILS investors have become more sophisticated and focused on their investment returns, the analysts explain, which leads them to believe that future ILS industry inflows are likely to be directed to more disciplined players.

Here they say that the ILS players that can access the best risks and demonstrate a strong track record of performance as the likely winners, which they say should also “be supportive for industry pricing.”

But of course, the reinsurance market as a whole remains very well-capitalised, except perhaps for in retrocession, and the fact that any rate rises have been achieved when the market has ample capacity still is a reflection of the strong discipline shown across both traditional and alternative market players, in the main.

Of course, there are always outliers and we understand some may have bulked up on Florida risk to capitalise on rates, which could leave them more exposed given the dearth of cheap retro. But that’s a story for another day.

“As excess capacity is unlikely to dissipate in the near term, we view it as a positive sign that rate rises can be still achieved despite excess capital in the market,” Berenberg’s analysts comment, which is also a positive for the future renewal seasons.

It suggests the market can hold a line and perhaps is installing a new floor on some peak zone catastrophe risk pricing, which given there haven’t been risk model updates to support this is very encouraging, we’d venture.

Still, the analysts do not believe we are in a hard market, just a firming one. But under the circumstances that is likely deemed as good enough by many, as long as the new floor on pricing can prove persistent.

An increased focus on profitability is evident, the analysts say.

It’s about time. The re/insurance market has bemoaned reductions in rate for almost a decade now, without responding in any meaningful way.

While it’s taken a particularly difficult and complex aggregation of catastrophe loss events, it’s about time this firming was witnessed.

If rates can hold and perhaps firm some more in January 2020 and beyond, April another likely candidate thanks to Jebi loss creep. Then by this time next year the real test will be on whether the market can hold the line and prevent a steady decline in rates re-emerging.

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