Growing reinsurance capacity to limit price rises: Moody’s Kingsley-Tomkins

While rating agency Moody’s Investors Service forecasts continued price momentum in reinsurance, VP and Insurance Credit Analyst Helena Kingsley-Tomkins explained that rising capacity is going to limit increases.

It’s testament to the current strength of the global reinsurance market that capacity continues to rise, with both traditional and alternative or ILS capacity both seen to increase in recent months.

This strength, in terms of capital, is also partly a function of the rate environment over recent years, as traditional reinsurers are starting to realise the benefits of consecutive renewals that have seen price increases, with their portfolios earning out more strongly, while they have been retaining more risk premium as well.

At the same time, the rate environment has also served to make insurance-linked securities (ILS) increasingly attractive, especially in the catastrophe bond market, resulting in ILS capital increasing.

The market is set for a balancing-act, between rates, growth and capital, which may result in an equilibrium or period of stability, or could eventually set in on course for a return to some softening.

But major reinsurers are bullish on the need for more price increases at the January 2022 renewals and beyond.

Discussing reinsurance market dynamics during a media briefing earlier this week, Moody’s analyst Helena Kingsley-Tomkins provided the rating agencies view.

She explained, “We think there is still enough momentum for further price increases, especially given the significant activity seen this year and also as reinsurers update their views of catastrophe risk in their pricing models.

“It’s suggested that social factors are driving up the risk and cost of catastrophes, especially in secondary perils.

“By using the latest technology and with the growing amounts of data, the reinsurance sector is able to build more robust models, which we think will support further increases in pricing.”

Kingsley-Tomkins highlighted that reinsurance rates remain below their recent peak of around a decade ago, adding that on catastrophe reinsurance, “We do see further scope for rate rises in this significant market segment.”

In particular a driver of more need for rate is the fact that reinsurers are now seen by Moody’s as more vulnerable to catastrophe events.

Kingsley-Tomkins explained that the earnings power of the reinsurance industry has been reduced, not just by loss activity and increasing frequency of secondary peril events, but also by low inflation and continued competition from alternative capital sources.

However, she cautioned that, “Growing reinsurance capacity is starting to limit the price rises reinsurers can put through.”

Further explaining that, “The sectors’ robust capital really underpins Moody’s stable outlook, even considering the earnings risk the sector faces today.”