While reinsurance rates have improved in the last year and are expected to improve further through 2020, the chances of a return to the “glory days of a robust non-life pricing environment” are seen as slim by rating agency A.M. Best.
Of course we’ve been writing for years now that the reinsurance cycle has changed for the better, with pricing dictated more by risk, capital and losses, than by relationships and payback nowadays.
This is better for everyone, as it suggests more rigorous pricing analysis needs to be undertaken to ensure reinsurance rates factor in and allow for both loss activity and also changes in the risk profile itself.
Which should deliver a more sustainable and ultimately stable pricing environment, to the benefit of reinsurance cedents and the insurance end-consumer as well.
Demand for reinsurance increased in 2019, A.M. Best highlighted in a recent report, explaining that this is down to recent loss experience and also moderating global economic expansion.
On an ongoing basis this is expected to continue, not least due to increased appetite for reinsurance coverage from government risk pools, such as the NFIP, the rating agency believes.
But, alongside higher demand, there is also expected to be a continued trend towards more intelligent utilisation of capital and capacity as well.
A.M. Best highlights the growing opportunities in property catastrophe retrocession, cyber reinsurance, mortgage insurance and reinsurance, as well as other emerging risks, as all set to drive growth for the reinsurance market.
The rating agency expects that all of this will “allow for greater utilization of available market capacity.”
Of course it may also allow for capacity growth, including inflows from collateralised sources of reinsurance, including insurance-linked securities (ILS) funds and investors.
Why this demand matters though, according to the rating agency, is that in aggregate, these factors should “help attenuate the long-term imbalance between the reinsurance supply and demand that has caused significant pressure on pricing over the last decade.”
But even though capital and deployment opportunities may become more balanced, A.M. Best warns not to expect a return to the market cycles of the past.
“The glory days of a robust non-life pricing environment may not return given the fluidity of capital inflows to the segment,” A.M. Best explains.
Tempering this though is the fact that the rating agency believes that pricing has not kept pace with the changing risk dynamics, which may mean we also don’t return to a softening environment for longer this time around, even if the market remained relatively free of significant loss activity.
All of which suggests more stability and discipline, which is good for everyone, especially so for the cedents that may face more predictable renewal pricing over the coming years (if this bears out).
While A.M. Best remains stable on the global reinsurance sector in general, the rating agency still has “looming concerns.”
Citing inadequate rates in certain US casualty lines, as well as the steady decline in reserves and diminishing releases. plus the persistently low interest rate environment which looks set to last ever longer.
“Addressing the effect of these factors in aggregate requires underwriting discipline; failure to react to these pressures could adversely affect the sector,” the rating agency said.
A more stable and predictable reinsurance pricing environment can only help in this regard, as too can a more disciplined approach to pricing based on the changing level of risks involved.
While the glory days of wild pricing cycles may be over, it could actually prove even more glorious for reinsurers who can ensure risk commensurate pricing while innovating to improve how their capacity is deployed, by taking additional costs out of the placement and operational pieces of their businesses.