Alternative capital and the insurance-linked securities (ILS) market is going to be an influential factor when it comes to determining just how much reinsurance and retrocession rates will rise in 2018, according to Fitch Ratings.
Fitch said that it does expect property and casualty reinsurance rates to rise in 2018, especially on U.S. catastrophe exposed business, but outside of the affected areas the rating agency notes that there is, “Less certainty over more widespread rate rises outside of these lines given the excess capital and the potential for new capital to enter the market.”
One of the key factors influencing the direction and trajectory of any reinsurance rate increases will be the extent to which more capital can be raised from insurance-linked securities (ILS) market, Fitch says.
With most ILS fund managers already raising capital from existing and new investors, plus a number of start-ups planning to launch at 1/1 2018, there is already plenty to suggest that new capital will largely replace that which has been lost or trapped.
Fitch also noted that the, “Amount of capital that remains ‘trapped’ by protracted litigation, particularly in relation to hurricane Harvey flooding losses, will also determine the degree that rates rise.”
It’s true that with Harvey being the most complex of losses there is the potential for collateral trapped due to that hurricane to be retained longer than from the other third-quarter catastrophe loss events.
However, Harvey is assumed to have trapped the least amount of collateral, so this may not be such a major influence on the trajectory of future rate increases.
Fitch said that capitalisation of reinsurers also remains strong, in the main, particularly among the largest in the reinsurance market. This will also influence rates, as it is hard to see reinsurers being able to push for large price increases while they still return excess capital to their shareholders.
The losses for the big four reinsurers will be manageable, but Fitch notes some smaller peers may not find them as easy to manage. But despite this no rating actions have been taken on any exposed reinsurers.
Fitch also noted that it believes that ample retrocession remains in place to cover any other losses that occurred before the end of this year.
Just how abundant alternative capital is in January and beyond is going to be a key decider in just how high rates will go in reinsurance and retrocession renewals. But perhaps more important than how much ILS capital is raised for the renewal is the risk appetite of that capital and what level of rate increase it is willing to accept.
That could become an even more important factor in the catastrophe bond market and as we move through 2018 towards the key mid-year Florida and U.S. catastrophe reinsurance renewals, by which time much of the trapped collateral issue will have been resolved and we could see an ILS market that is bigger than it was just prior to the hurricanes.
Join us in New York in February 2018 for our next ILS conference