The 2017 Atlantic tropical storm and hurricane season officially begins today and, as ever, insurance and reinsurance companies enter the season as well-prepared as can be expected, in this market awash with capital and capacity, but the real threat, according to Fitch Ratings, continues to be pricing.
As well as being the start of the hurricane season it is also the June 1st reinsurance renewals today and with pricing on catastrophe bonds and other insurance-linked securities (ILS) having been very competitive over recent weeks, it’s no surprise that the reinsurance renewals have seen price declines a little steeper than had been expected.
Generally the market views pricing as having come down further at June 1st, with single digit declines widely cited and some programs seeing declines of 5% or greater. That’s hardly the stability that had been hoped for and reinsurance firms have also cited strong competition from collateralized markets and ILS funds this June.
Pricing in perhaps the most hurricane exposed area, Florida, has generally come off by around the 5% mark, which is actually a little faster than pricing was reported to have come down at the mid-year 2016 renewals.
There is a lot of discussion about the cause, with the competitive pricing seen in catastrophe bond and ILS markets a clear driver for further price declines on Florida and other U.S. catastrophe exposed reinsurance programs, although we also understand that highly competitive traditional reinsurers have been exacerbating pressure on pricing.
“The real storm for p/c insurers continues to be the competitive pricing environment,” warned Christopher Grimes, Director Fitch Ratings.
“2017 is more likely to be an active hurricane season according to meteorologists, but minus any extremely severe storms, most insurers should be able to manage losses that may unfold,” he continued.
Insurance pricing on hurricane exposed U.S. property has not improved in the wake of last years hurricane Matthew, Fitch explained, and at the same time reinsurance pricing remains heavily under pressure, due to excess levels of capacity, sluggish demand and continually growing competition from alternative sources.
“Fitch expects pricing conditions to remain challenging in the primary property market, particularly commercial property, as well as at the midyear 2017 reinsurance renewals,” the rating agency said.
Continuing to explain that it “Expects pricing conditions to remain challenging at the June/July midyear 2017 renewals, with rate declines continuing in midsingle digits as surplus capacity puts additional downward pressure on premium prices,” something that has been borne out in the renewals completed to date, based on pricing discussions we’ve had.
Fitch noted the importance of the Florida property catastrophe reinsurance market, given it remains the largest peak zone for reinsurance.
This explains the levels of competition reported, as this is a key market for reinsurers and ILS fund returns.
With ILS investors having clearly demonstrated their appetites for a certain level of risks through recent catastrophe bond transactions, where pricing has fallen year-on-year again. Similar pricing breaks have been seen on the reinsurance programs where ILS funds have been increasing their fully-collateralized participation.
Funds we’ve spoken with all discussed a highly competitive June renewal, particularly in Florida and other wind exposed U.S. regions, but pricing, while seen to still be very low, is still seen as delivering sufficient margin for ILS strategies to continue to profit.
This is helped by the increasing scale of many ILS fund managers, as well as their increasing reach into other countries and markets. This has helped them to sustain pricing lows and accept further price cuts, in some cases.
The traditional reinsurers, meanwhile, face the problem of needing to participate in these peak zone markets, sometimes at any cost.
For the major global players, where discounting for diversification is the mantra of late, it is possible to sustain lower pricing for longer. For some of the more focused, or catastrophe specialist reinsurers that do not have the same global, multi-class reach, the question remains how long they can sustain reinsurance pricing at the levels seen today, as well as what will happen to them when the next big loss occurs and they cannot achieve the payback they might be hoping for?
While their remains margin in reinsurance business that is acceptable to the players with the lowest cost-of-capital and most efficient capacity (so read ILS players, collateralized reinsurance vehicles and major global reinsurers) we can expect prices to remain where they are (absent a truly market and view-of-risk changing loss).
Thoughts come back to efficiency, not just of capital or capacity but of the overall operational efficiency of different business models in reinsurance and whether they are sustainable models in the current pricing climate.
So far the pricing levels in reinsurance are not just being sustained, but are declining further, which suggests reinsurers feel comfortable with them, for now.
Sustaining pricing, perhaps in the hope of a turn, seems an increasingly foolish strategy, when you consider where ILS pricing sits and the levels that major reinsurers are willing to wield diversification to.
Whether that turns out to be a fallacy or not remains to be seen, but one thing is certain, if reinsurers felt pressured before that’s only going to get worse as they turn over their portfolios and renew them at even lower rates.
Expect more of the same for the July renewing reinsurance programs, the threat from low pricing is set to continue.
Join Artemis in Singapore on July 13th 2017 for ILS Asia, tickets on sale here