Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

Fitch see some positive signs on pricing


As ever there is a lot of talk in the market about rates, pricing and which way these will go at the 1st January 2012 renewals when a large amount of the worlds reinsurance treaties are renewed. Currently it looks like the trend seen throughout this year will continue, some rises in catastrophe hit regions of the world but flat to very small rises in others.

Specifically most of the chatter refers to catastrophe reinsurance as that’s the big draw and the area that many within the market believe needs to rise the most as it’s widely felt among reinsurers that it’s becoming unprofitable and slightly risky (although some would argue strongly against that).

Rate rises are often driven from the ground up, so if insurance rates are rising the eventual effect will be that reinsurance rates rise to accommodate the changed pricing. The recently completed Council of Insurance Agents & Brokers’ Commercial P/C Market Index Survey showed an average rise of 0.9% in Q3 across small, medium and large accounts and representatives said this is due to significant capital in the marketplace keeping prices down. However they do concede that rates appear to be edging towards positive territory.

Fitch Ratings concur and say (you may need to log in to read that article) that there are beginning to be signs of a pricing shift due to continuing catastrophe losses. They view the improving pricing as a sign that insurer return on capital will stabilize during 2012. Insurers are mostly reporting substantially reduced profits for the third quarter or losses and this will help to keep some pressure on pricing and rates going forwards.

However, Fitch say that mid-single digit returns on capital are likely to be the norm for the market for the next several years. That won’t please those seeking larger returns. Market participants and commentators we speak with suggest we could be heading for a period of consolidation, where we’ll see some return to mergers and acquisitions and even some firms put into run-off type situations due to a lack of profitability. One investment manager we spoke with said they expect to see the number of reinsurers fall as the market consolidates and business models adjust to become more lean and cost efficient. This could bode well for the new breed of collateralized reinsurers.

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