Everyone in reinsurance, from major reinsurance firms to the smallest insurance-linked securities (ILS) player, is anticipating further rate firming at the January 2020 renewals, with Hannover Re among the latest to join the calls for higher priced protection.
The company explained yesterday in Monte Carlo that it anticipates receiving improved pricing and better conditions for putting out its capacity at 2020 reinsurance renewals.
Citing challanges to the business models of reinsurers, Hannover Re explained that the industry faces continued “surplus capacities and historically low interest rates.”
“Prices and conditions have nevertheless taken an appreciably more pleasing turn in 2019 compared to just one year earlier,” the company said.
Adding that primary rate hikes are being seen broadly, which are feeding through into higher reinsurance rates as well.
But for the moment this recovery remains “muted” the German reinsurance firm said.
“In recent months we have been able to secure initial price increases across the board,” Chief Executive Officer Jean-Jacques Henchoz commented.
“The renewed drop in interest rates and the considerable strains from large losses underscore the need for improved prices and conditions in the upcoming year’s renewals. Given the challenging market environment that we are still facing, we shall continue to keep a very close eye on price and risk adequacy and will put profitability before growth.”
Rate declines seen in the run up to 2017 have left the industry feeling the pain through poor technical results, the company believes.
After which the additional large losses in 2018 have added pressure and now the interest rate environment (a real talking point in Monaco this year) is expected to pile on further difficulties by making it harder to earn a return on liabilities held.
At the same time Hannover Re believes that underwriting discipline is on the rise, tightening in the primary market with benefits flowing through to proportional reinsurance already.
Given the still high competition and excess capital, the need for underwriting discipline to maintain any increase in rates is clear.
But still the industry is not answering the question of cost of its product and market-chain adequately, according to many risk protection buyers we’ve spoken with in Monte Carlo this year.
As rates have risen in loss impacted regions and to underperforming accounts, Hannover Re sees a market that now has “rates broadly commensurate with the risks.”
Which sounds like hardening may almost have been sufficient, as underwriting risks at a rate commensurate with the risk taken on is surely as high as any efficient market will allow them to go? But then reinsurance is not yet all that efficient and so buyers may need to pay more as companies establish where their risk appetite allows the pricing baseline to sit.
We believe some companies are going to find their baseline risk appetite sooner than others, leading to some being disappointed by the size of rate increases into 2020. While others, that are covering loss costs, cost of capital and expenses satisfactorily, thanks to more efficient models of capital raising, allocation and deployment, may find they can be very competitive once again next year.
But further rate increases are desired and anticipated after the consecutive difficult years of losses it seems.
Hannover Re expects a range of firming across the world and lines of business over the coming year at renewals.
In property catastrophe risks in particular, Hannover Re anticipates further single-digit range firming will be found in North America in 2020 and believes significant rate increases will be seen in Japan, given loss experience in those two markets.
While in Europe and Australia / New Zealand, prices are likely to be flatter, although with some rises depending on relationships held, the reinsurers believes.
Overall at 2020 treaty reinsurance renewals, Hannover Re anticipates improved prices and conditions, the company said.
While at the same time the reinsurer expects to find further opportunities to grow.
“Quick decision-making channels and flexibility as well as our market intimacy are the competitive advantages that our customers value,” Henchoz said. “Emerging markets, in particular, still offer vast potential in terms of the insurability of risks and medium- to long-term growth.”
As ever, while the broad expectation for rate rises is coming across strongly in Monte Carlo this year and it’s clear that further rate is needed in some areas. It’s not so clear that this should be as widespread as some are hoping for.
For example, European property cat risks remain priced very softly. So soft that some ILS funds shy away from this region.
Why? Largely because the major global (European headquartered) reinsurance firms soak this business up at rates barely above expected loss. Rate levels that some ILS managers won’t stoop to for their investors.
As ever, when the market is predicting rate increases there will be a ceiling for how high they can go.
How high up that ceiling is depends on your business model, capital efficiency and ability to take costs out of the chain. As a result, on underwriters price ceiling is still another’s floor. All of which means someone is bound to be disappointed again.
Until the market does become an efficient one, price cycles based on payback and relationships appear set to continue, albeit at a more moderate and squeezed level of amplitude.
Efficiency and the ability of the market to have a consensus and price risk is coming in time, but for now a determination could drive rates higher, of course making this still an attractive time for ILS inflows to begin again.