The prospect of higher reinsurance rates is beginning to seem more of an inevitability as reinsurance firms and industry experts suggest that rate rises are already being seen in some regions of the world and expected to start soon in others. A.M. Best report today that re/insurers are preserving capital in anticipation of higher rates as they see growing pressure in the market to support rate rises.
The high catastrophe losses experienced in recent months could be the catalyst that begins a turn towards higher rates across the board. Rate rises are evident in regions affected by disasters, including Australia, New Zealand and of course Japan, but reinsurance rate rises are now expected in places such as Florida when the June/July renewals begin soon. A.M. Best cite the recent catastrophes, the new RMS U.S. hurricane model, higher capital requirements of Solvency II and the still challenging economic environment of low investment yields and a dollar under pressure all as reasons pointing towards rate rises.
The Financial Times reports that global reinsurers are forecasting rate rises of 10% or more for the Florida renewals and U.S. catastrophe cover. Meanwhile Global Reinsurance report that Flagstone Re has said that there are indications that rates will rise in the coming renewals.
A.M. Best close their article by saying:
As reinsurers are already trading on a thinner capital base, they will have to press for sufficient rate increases to earn back lost capital. While they are able to withstand the significant losses of the past few months, achieving underwriting profits for the full financial year could become more challenging as the market enters the hurricane season, which runs until the end of November.
Higher reinsurance rates could help to make catastrophe bonds an even more attractive option, especially for the higher layers of cover re/insurers will be seeking to replace protection eroded by recent claims. The higher rates are also expected to result in more sidecar formations as reinsurers seek to recapitalize in the most cost effective manner.