The January 2017 reinsurance renewals are likely to see pricing and rates coming in below the stable levels that have been forecast by a number of large re/insurers, according to analysts at KBW reflecting on what they learned at the 2016 Monte Carlo Reinsurance Rendez-vous.
“We suspect that 1/1/17 reinsurance renewal pricing will come in modestly below the “stabilization” that several large reinsurers (optimistically, we think) projected ahead of the Rendez-Vous,” lead analyst Meyer Shields writes in an update on what the KBW analyst team took away from Monte Carlo in 2016.
Slow and steady deterioration of reinsurance rates in January seems to be the message that many came away from Monte Carlo with.
With expectations that some of the larger ILS fund managers will raise additional third-party capital in time for the 1/1 renewals, as well as more start-up internal reinsurance vehicles, funded by alternative capital, expected to ramp up capacity or to newly launch, pressure from excess capacity is expected to result in another decline in pricing.
Discussions Artemis had with ceding companies, re/insurers and insurance-linked investment managers at the Rendez-vous led us to the conclusion that rates could fall -2% to -7% in many lines, with some more stable than others depending on the level of competition seen.
If the rest of 2016 remains relatively benign, from a catastrophe and major loss point of view, KBW says the deterioration is expected to continue.
“We view this as typical cyclicality, and see no reason to expect anything besides slow margin erosion for most carriers,” the analysts wrote.
“W e still expect moderating commercial insurance and reinsurance rate decreases and loss cost inflation to erode most insurers’ accident-year profits, likely exacerbated by slowing reserve releases and declining investment income, and possibly worsened further by a return to (or above) normalized catastrophe losses,” they continued.
On the brighter side, KBW subscribe to the growing opinion that reinsurance demand is set to increase, albeit only “a modest reinsurance demand uptick,” as reported by brokers. In fact even reinsurance giant Munich Re said that it does not expect any significant demand increases in insurance or reinsurance.
However, KBW still feels supply and demand is out of balance and that this means even ceding companies who do buy more reinsurance are still embracing the centralisation trend with smaller panels of reinsurers, which will continue to pressure smaller to mid-tier reinsurers the most.
With reinsurance rate softening expected to continue and no sign of the centralised buying and consolidation of panels stopping, the future for smaller players, who cannot specialise, reduce their cost-of-capital or add value in another way, does seem bleak right now.
Reinsurers are also likely to exacerbate and accentuate pricing pressure, as some still seek growth, to shift into other lines and will continue to compete heavily and wield the diversification stick to push ILS capacity back.
With reserve releases anticipated to perhaps become less sustainable and reinsurance returns on equity shrinking dramatically, pressure for reinsurers will eventually manifest itself in some companies results, with frequency and aggregation of catastrophe losses a possible concern for some players that may have expanded terms, or lowered prices, further than advisable.
KBW analysts said that many of the reinsurers they spoke with said they continue to be ready to pull-back further if prices drop again. It would be interesting to see how they would maintain profitability if that is indeed the case. Others will switch more capacity to more profitable areas, however it is to be hoped that they have the underwriting and reserving expertise to be able to manage these switches.
Reinsurance renewals look destined to become increasingly about adding value to clients, rather than price alone, as that is one area that reinsurers and ILS fund managers can offer a differentiated service rather than simply a commoditised price.
Read all of Artemis’ Monte Carlo Rendez-vous coverage here.
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