Swiss Re Insurance-Linked Fund Management

Original Risk: A Society for Change Agents

It’s not just ILS pricing that’s decoupled from traditional reinsurance…


We’ve been talking for a while about the gradual decoupling of pricing of insurance-linked securities and catastrophe bonds from traditional reinsurance rates. Essentially this means that ILS and cat bonds can now be cheaper and no longer follow exactly the same pricing patterns that are seen across the broader reinsurance market.

It can also be said that many sources of collateralized reinsurance capacity, backed by third-party investors, has also decoupled from traditional reinsurance and again it can now be cheaper and doesn’t quite move in the same way as traditional reinsurance.

There are many reasons for the decoupling, cheaper cost of ILS and third-party capital being a major one, but also the structural differences, risk appetite of the capital providers and different outlook of ILS capital (often having more of a trader than traditional underwriter mentality) being a few.

But it’s not just ILS, cat bonds and collateralized third-party backed reinsurance capacity pricing that has finally decoupled from traditional reinsurance in recent months. It looks like primary insurance rates have decoupled too.

As we wrote earlier today, the decline in traditional reinsurance pricing is not yet being passed on in full to primary insurer clients. It seems that the Brown & Brown execs we quoted in that piece are not the only ones to notice this side-effect of the pricing pressure that the capital markets have placed on reinsurance.

Analyst firm Sandler O’Neill + Partners has also noticed this trend and mentions it in a recent research comment on the property-casualty insurance sector. In the research note, the analysts from Sandler O’Neill note the influence that the capital markets are having on traditional reinsurance pricing, leading to a softening of reinsurance rates and reduced cost of ILS and collateralized alternatives.

The analysts see reinsurance pricing as largely soft, definitely across the property catastrophe reinsurance space, but likely also across non-catastrophe excess of loss reinsurance contracts as well.

Interestingly, the analysts say that it will be interesting to hear what insurance company managements have to say about the recent pricing trends about the reinsurance pricing environment, “As that seems to have decoupled from primary insurance.”

It’s an interesting and timely comment. As we said in our article earlier today, it seems that primary insurance carriers are waiting to drop their rates as the hurricane season progresses to establish whether there are any losses which could turn catastrophe reinsurance hard again. How long it will be till primary insurance rates re-align with reinsurance rates is anyone’s guess though and it will be interesting to see how primary carriers cope in an environment of reduced reinsurance pricing if it sustains for a number of reinsurance cycles to come.

It is further evidence of the influence of capital markets capital flowing into the reinsurance space; third-party capital backed capacity increases – ILS and collateralized reinsurance gets cheaper – decouples from traditional reinsurance – traditional reinsurance reduces its rates to compete – that decouples it from primary insurance – primary carriers wait and see…

We could be in for a lot of unusual pricing trends across the reinsurance, insurance and ILS and capital market alternatives over the coming months, as the markets come to terms with, and get to grips with, how to leverage money from third-party investors in the most efficient manner for reinsurance and insurance underwriting. Interesting times ahead!

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