Reinsurance market conditions are similar to that of 1997 as pricing continues to soften, and despite what some experts believe, analysts at Macquarie Research warn that a major catastrophe might not be enough to effectively turn the reinsurance market.
Macquarie Research recently published a report titled ‘Back to the Future and Back Again,’ following a January 1st renewals re/insurance market conditions update call, which included a primary insurer, reinsurer, international broker and a research scientist.
The report looks at the main factors impacting the global re/insurance market, including the effect a benign catastrophe season can have on an already stressed market.
However, unlike many others, analysts on the call warned that a large event might not be enough to turn the reinsurance market’s direction; a historic example provided in the report offers a useful insight.
“The last hard market of the early 2000s resulted from a combination of a stock market crash, 9/11, and Hurricanes Ivan, Charles, Katrina, Wilma and Rita to eventually lead to a longer hard market,” the report states, adding that; “Those conditions may not repeat.”
The general consensus throughout last year was that a large loss would be significant enough to reverse some of the negative pressures impacting reinsurance pricing. Artemis noted in July last year that Aon Benfield felt a $100 billion loss event would cause a change in rate trajectory, but it appears that some industry experts feel a combination of large loss events is what’s needed to change the current challenging market environment.
A panellist on Macquarie’s re/insurance market update call, Dr. Phil Klotzbach, Research Scientist, Colorado State University, expanded a little on the lack of major catastrophe events using the quiet US hurricane season as an example.
Dr. Klotzbach explained that despite being in an active Atlantic hurricane basin for the last 20 years, a record nine-years without a Florida landfalling hurricane has now been set, highlighting just how benign the season has been.
This section of the report concludes that; “Based on the last two years and the 2015 preliminary estimates, he noted (Dr. Klotzbach) we could be entering a period of a quiet Atlantic hurricane basin.”
Macquarie analysts continue to explain that loss trends for reinsurers have been significantly absent in the current market, with the usual benefits to reinsurance companies being missed “due to ceding commissions and reinstatements.”
Participating analysts explained that pricing at 1/1 renewals fell in line with expectations as recent renewal trends continued, a view amplified by broker Guy Carpenter, as reported earlier this month by Artemis.
A section of the report also looks forward at the potential for consolidation and merger deals, revealing that one panelist predicts that Bermuda, an international reinsurance hub, will have a lot less reinsurers five years from now.
The reason for this, according to Macquarie analysts is that; “As capital remains abundant, pricing stays competitive, and the need for scale increases, reinsurers will be forced to combine to stay relevant in the market.”
Again, this is a widely perceived view of what smaller-medium sized reinsurers will need to do in order to keep pace with some of the larger firms. Fitch Ratings shared this opinion during Q4 2014, as reported by Artemis.
Despite a slightly varied opinion on how large a loss is required to return the reinsurance market, Macquarie’s analysis and outlook for the reinsurance space is much the same as others.
To conclude, Macquarie states that; “The combination of pricing competition, loosening of terms and conditions, lack of large losses to turn pricing, rising loss cost inflation, and the Terrorism Risk Insurance Program Reauthorization Act (TRIPRA) non-renewal are all headwinds facing the sector.”