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June 1 reinsurance renewals expected down 3% to 5%: Morgan Stanley


Pricing at the key June 1st reinsurance renewal season is expected to decline by an average of 3% to 5%, according to data gathered by Morgan Stanley analysts from Bermudian reinsurance firms, and rates may now reach a floor it is believed.

With June reinsurance renewals pricing, terms and conditions largely fixed days in advance of the actual 1st June renewal date, Morgan Stanley’s analysts took a trip to Bermuda to discuss the outlook for the market with key Bermuda based reinsurers.

The June 1 reinsurance renewals feature a significant proportion of the U.S. and Florida property catastrophe reinsurance market annual transaction volumes, and with Bermudians playing a central role still in this market the insight gathered provides a useful indication of what we can expect to be more widely reported in the coming days.

Higher catastrophe losses in the second quarter is just one story as the mid-year reinsurance renewals approached in 2016, but an unlikely one to have affected rates or pricing it is felt, as the trajectory and speed of rate declines was felt to have been slowing across the last few renewals.

The analysts from Morgan Stanley met with 10 Bermudian re/insurers in advance of the renewals and the overwhelming feedback was that while rate declines would continue, they would decelerate as expected, falling widely into a -3% to -5% expected range and that following this renewal they may even find the much searched for reinsurance pricing floor.

The continued deceleration of reinsurance rate declines at consecutive renewals is a sign of approaching stabilisation, the analysts explain with the -3% to -5% a slower rate of decline than the -5% from January 1st, the -5% to -10% seen in 2015, the -15% in 2014 and -20% in 2013.

Overall the analysts put the reinsurance rate decline at 40%+ over the last three years, depending on line of business and region of exposure. Following this persistent period of price pressure traditional reinsurance firms are now pulling back, the analysts explain, as “returns approach high-single digit in this volatile line.”

Morgan Stanley’s analysts also note that growth of alternative capital has slowed, which they attribute to the fact that margins have deteriorated and products have not yet been tested by large losses.

Of course the slow down in growth of alternative reinsurance capital can also be attributed to discipline, something reflected in the widening of spreads in the catastrophe bond market, as the return above expected loss has risen by almost a percent in 2016 so far (as evidenced by our chart here).

Reinsurance demand in the key market of Florida has been seen as largely stable in 2016, Morgan Stanley said, with a reduction in Florida Citizen’s renewal easily offset by increasing demand from private primary insurers in the state.

But importantly, the feedback received from Bermudian reinsurance firms suggests that recent catastrophe and weather losses seen in the first-half of 2016 are not expected to be sufficient to turn pricing.

So while the expectation is that the declines in pricing seen this June 1st could signal the imposition of a floor on pricing, particularly of property catastrophe reinsurance, there is not yet any expectation that rates will rise.

The analysts from Morgan Stanley continue to estimate that every 5% decline in reinsurance pricing can translate into an impact to return on equity (RoE) of 2 percentage points or more. So with reinsurance pricing down 40% or more over three or four years, on that basis reinsurers could have lost 16 percentage points of RoE contribution from their property catastrophe portfolios in that time.

It’s encouraging that the analysts note some push-back from traditional reinsurers on business which does not meet their return hurdles. This, combined with a higher level of catastrophe losses, volatility in investment markets and industry consolidation is beginning to restore “some balance in pricing” Morgan Stanley claims.

In terms of what could change the market at future reinsurance renewals, large catastrophe losses, a surprise impact from unmodelled risks, are the two main possibilities, the analysts say. Other factors such as rising interest rates could moderate supply and demand, as well as new sources of demand for protection.

But all of that is caveated with the fact that one of the great unknowns is the fact that a “large potential supply of alternative capital could fundamentally dampen the magnitude of future pricing upswings.”

So another reinsurance renewal, another decline in prices. Anecdotally, we’ve heard that terms and conditions have remained largely stable, on elements such as the hours clause and bundling of risks, although we’re told account specific terms expansion is still a feature of this market.

But largely our sources suggest that the June reinsurance renewal has been fairly disciplined and balanced, with markets pulling back if prices don’t meet their return requirements although at the same time there has been plenty of capacity to meet most cedent’s demands for risk capital.

Tiering has remained a feature of the reinsurance market at the June 1 renewal, with reinsurers increasingly becoming selective of the cedants they deal with and pricing varying by the quality of the cedants underwriting and portfolio, we’re told.

With pricing seemingly leveling off, thoughts turn to questions such as how long low pricing can be sustained and what of the reinsurers that have diverted capital into longer-tailed lines such as casualty? Those are factors that we may not fully understand for some renewals to come, or until losses strike the market in a more meaningful or sustained way.

We’ll have more reinsurance renewal coverage in the coming days and weeks, as the market moves through this key period. Keep up with it all here.

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