The growth of ILS markets at January 1st 2018 was a factor that meant rate momentum decelerated, as they offered more capacity than a year earlier despite the major losses suffered and subsequent trapping of capital, according to reinsurance giant Hannover Re.
The reinsurer reports that the 1/1 renewals were challenged by a continuation of the over-capitalisation of the reinsurance market, both on the traditional and alternative side, but still Hannover Re underwrote an enlarged book of business as it took the opportunity to capitalise on increased pricing.
Hannover Re noted that reinsurance capacity remained “on a high” at the renewal, as the markets earnings effectively absorbed the losses from 2017’s major catastrophe events.
Additionally, the reinsurance market demonstrated its ability to respond to losses in an orderly fashion, but as a result rate increases did not live up to expectations, even in loss-affected areas, the reinsurer said, although Hannover Re did note that some double-digit increases were secured.
One factor that slowed down the potential momentum of rates at 1/1 was the insurance-linked securities (ILS) markets ability to recapitalise.
Hannover Re explains that rate momentum decelerated at the renewals due to, “ongoing growth of alternative capital and unchanged supply of capacity from traditional reinsurance.”
Additionally, the influence of the ILS sector was once again strong at the renewals, despite the fears that ILS players would not be able to command as much capacity due to losses and trapping of capital.
In fact, Hannover Re notes that the renewals saw, “ILS markets offering more capacity than at the start of 2017 despite trapping of ILS capital.”
Of course, Hannover Re is closely attuned to the ILS market, given the company’s role as a facilitator, fronting provider and sometimes transformer of risks for the collateralized reinsurance players and investors.
But it’s clear that there has been some disappointment at the renewals, due to the influence of capital and the ILS markets ability to raise fresh funding and recapitalise more quickly than many had anticipated.
“Reinsurers and also the ILS markets did not scale back the available capacity in any area; quite the contrary, in many instances even more capacity was offered,” Hannover Re explained. “This excess supply relative to demand meant that rate rises generally remained on the moderate side, as a consequence of which it was still not always possible to secure prices that were commensurate with the risks.”
Of course prices that are not deemed commensurate with the risk by one player, like Hannover Re, are not necessarily deemed so by another.
With the reinsurance market increasingly and acutely aware that different forms of capital have different risk appetites and return requirements, while larger reinsurers appear to have bulked up at the renewals it does seem that so too has the ILS market, leaving us to wonder whose expense this has been at?
Hannover Re has grown its book at the renewals, with premium volume in traditional property and casualty reinsurance rising by an impressive 12.7%. The reinsurer even reported 7% growth in natural catastrophe risk underwriting.
Hannover Re’s growth at renewals will, like its fellow reinsurance giant Munich Re, have been on a relatively selective basis, given the lack of momentum on rates.
But this growth positions the reinsurers for a better year, with Hannover Re now forecasting a higher group net income for 2018, with EUR 1 billion possible as long as losses remain within budgeted amounts.
But these major global players will also now be carrying more risk on their books as well as more potential to profit, due to their growth at the renewals, which in Hannover Re’s case, and probably its cohorts, includes an increased amount of catastrophe exposure.
Both Hannover Re and Munich Re grew their collateralized reinsurance sidecars for 2018, but the growth in these vehicles was not really considerable enough to de-risk the front-end underwriting growth they have experienced alone.
As a result it will be interesting to see whether these companies look to take greater advantage of retrocession, perhaps also from the capital markets, during 2018, as they are both likely to grow their books further at the upcoming renewal seasons if rate momentum can be sustained at what was seen in January.