After further steep reinsurance renewal rate declines seen at the mid-year June and July renewals, analysts at Keefe Bruyette & Woods expect that January 2015 renewals will see reinsurance rates having to catch up (or down) to these new low-levels.
In a report KBW analysts led by Meyer Shields said that reinsurers have long-since abandoned any hope that rates would stop declining once they caught up to the lows seen a year ago. The rate decreases have continued in January 2014, April, June and most recently July and now the expectation is that we could see further declines in January.
The January 2015 reinsurance renewals will see many of the world’s largest catastrophe reinsurance programs renewed and also a lot of retrocessional reinsurance programs. These could see further declines, as the market catches up to the lows seen at the recent mid-year renewals.
How far down rates will decline is uncertain. Analysts at Barclays said recently that if the reinsurance market remains free of major catastrophe losses for the rest of 2014 they expect reinsurance rate declines in the order of -15% in 2015.
KWB analysts concur , saying that as catastrophe losses have remained minimal and capital inflows into reinsurance continue to depress pricing, if all remains equal further reinsurance rate declines are likely at the next major renewal season in January as rates will at least have to catch up to the lows set at mid-year.
KBW said; “Absent a major loss event (and we think, even with an event), the pricing pressure stemming from current and potential excess supply will likely get worse before it gets better.”
KBW also thinks that pricing pressure will continue to affect areas outside of property catastrophe reinsurance.
“Third-party capital is still focused primarily on catastrophe lines that are seen as both model-able and independent from other financial markets, but there is apparently at least an indirect impact on other reinsurance and specialty insurance lines’ pricing, which is probably exacerbated by persistently (albeit superficially, in our view) adequate overall returns,” the analysts explained.
Reinsurers looking to the solace of the primary insurance market may find things less attractive than a year ago as well. KBW explains that commercial insurance rate increases are fading, perhaps no longer outpacing inflationary levels. Also the very large primary accounts are no longer seeing the rate increases they were a year ago and this is the area many of the globally diverse reinsurers are looking to.
The outlook remains gloomy for reinsurers at the moment and analysts opinions are converging on further rate decreases, more pressure from third-party reinsurance capital and insurance-linked securities, while opportunities to look elsewhere for a better rate environment are also decreasing.
Combined these influences could make for a difficult January renewal season for the traditional reinsurance market. The low rates will also likely see terms and conditions continue to be relaxed in reinsurance and catastrophe bond, ILS and collateralized reinsurance pricing remain low.
It will be interesting, as we approach the end of the year and first the PR opportunities of Monte Carlo RVS and Baden-Baden, to see just how the tone from reinsurance and ILS industry participants changes as they face up to the challenging times that may be ahead.