In its fourth year, the softening reinsurance market cycle continues to dampen prospectus returns for reinsurers, but with many in the sector remaining profitable and the industry RoE expected to be good, driven by benign losses and high reserve releases, the sector could struggle to remain flat at 1/1 2017, according to Hannover Re.
Germany domiciled investment banking and private banking company, Berenberg, has published some thoughts and insight from its recent roadshow with reinsurance giant Hannover Re, where pricing, perhaps unsurprisingly, was a key theme of discussion.
The reinsurance company remains cautious about pricing in the global reinsurance industry at the upcoming January 1st 2017 renewal season; despite the fact the softening market cycle looks set to enter its fifth year, as continued profitability of the overall sector suggests the marketplace will struggle to remain flat.
“Hannover Re remains cautious on the outlook for pricing ahead of 1 January 201y renewals. Primarily, this is because reported industry ROE is likely to remain good in 2016 as a result of modest catastrophe loss experience and strong reserving levels,” explains Berenberg in its note on its roadshow with Hannover Re.
According to Berenberg the German reinsurer doesn’t expect the market to turn and rates to improve until the industry RoE falls below 5%, as this has been the case in previous cycles, meaning that rates are expected to fall further at the upcoming renewals across a number of business lines, albeit at a slower pace than previously.
“That said, Hannover Re does expect to see some moderation in the rate declines reported at 1 January. Although the industry remains highly competitive, the increasing use of pricing models and the pressure from low interest rates means that many of the major writers are standing (fairly) firm on rates and terms and conditions at this level, which should support the market,” notes the report.
Some of the early conversations Artemis has had with industry participants does suggests that the expected bottoming of the pricing cycle at 1/1 2017, might not materialize in such a way that some market analysts and observers are predicting.
In fact, some of the conversations we’ve had suggests that some property catastrophe exposed accounts could be looking at rate declines of up to 10% in January, which implies the market perhaps isn’t as close to the bottom of the softening cycle as many had hoped.
Clearly this isn’t the case for all accounts, but from the early discussions we’ve had it appears that property catastrophe exposed accounts are going to suffer more than others at 1/1, further highlighting the important role discipline is going to play, yet again, at the upcoming, key renewal period.
Typically, an RoE of sub 9% is low for the reinsurance industry, but during the softening market cycle this seems to have become the new norm, with the industry RoE reportedly hovering around the 8% – 9% mark.
However, it’s important to note, and as stressed by Hannover Re in its talks with Berenberg, that the benign loss experience and increased reserve releases has enabled companies, and the sector as whole to report acceptable RoEs, that perhaps aren’t a true reflection of the industry’s profitability.
Losses have picked up in recent times when compared with previous years, emphasized by the impact of hurricane Matthew, the Alberta, Canada wildfires, and a series of severe storms and earthquakes across the globe.
But the strong capitalization of the re/insurance industry, exacerbated by the rise of alternative reinsurance capital, means that the sector is more than capable at absorbing losses of this magnitude, without it resulting in any meaningful turn in pricing metrics.
So the message from Hannover is that pricing is expected to fall at 1/1 2017, albeit at a moderated pace. However, the continued profitability of the overall sector and early comments from some in the sector, suggests that rate decline deceleration could be less so than what some players are expecting, and hoping for.
“In the longer term, Hannover Re believes that a similar hard market to that seen in, for example, the early-2000s is unlikely as there is so much capital on the side lines, waiting to enter after a major event such that supply would meet demand much faster than in the past,” notes the Berenberg report.