It’s perhaps not the level of reinsurance rate increase that many have been hoping for, after the 20%+ rises seen across April and mid-year renewal cycles, but analysts at Morgan Stanley are bullish that January 2021 will see the highest increases since 2018.
Morgan Stanley’s equity analyst team that tracks the insurance and reinsurance industry are calling for January 2021 reinsurance renewal rate increases to average 6% to 7% across the market.
While that seems low, compared to the mid-year, put in the context of the huge amount of international and European reinsurance or retrocession business that renews in January, as an average that is actually quite high.
After the January renewals of this year, some major reinsurers like Munich Re and SCOR were only quoting increases of 2% to 3% across their books.
So if the market can achieve an increase of 6% or 7% across its book, that actually implies a particularly buoyant January renewal marketplace is ahead.
It also means it will be a competitive renewal marketplace, of course.
As rate increases of that amount imply that Europe will see some of the strongest rate increases seen perhaps in much longer than since 2018 (we’d suggest it may be the highest Jan increases for even longer).
With the European reinsurance market still dominated by the big four, these enormous underwriters will be going out of their way to retain their shares and even grow, in the improved rate environment.
Which will dampen the potential for where rates could actually have got to, but should also leave pockets of more attractive opportunity for the well-established insurance-linked securities (ILS) fund managers and also the writers of collateralised reinsurance and retrocession.
Retrocession is something these reinsurers are going to be needing as well, so we should expect to see more tapping of third-party capital structures to support the continued growth of major players into the 2021 renewal seasons.
Third-party reinsurance capital is now the accepted form of “elastic capital” that can enable these players to take on more peak zone risk, while moderating their PML’s.
We’ve seen this in spades lately with the likes of Swiss Re, effectively moderating its PML and risk appetite through the use of third-party capital structures including catastrophe bonds and its ILS relationships with major institutional investors.
So the Morgan Stanley analysts say, “We expect pricing momentum to continue in 2020/21, with January 1, 2021 renewal price increases of 6-7%. This would be the most significant increase since January 1, 2018.
“We are becoming increasingly confident that the large incumbent reinsurers will see a benefit from the improving cycle, not just the smaller, nimble players.”
Despite the hardening of reinsurance, the analysts note that balance-sheet strength remains a key driver of performance for traditional reinsurers.
But they note that those able to “absorb balance-sheet volatility” may be best positioned.
Here is where third-party capital can help, as an absorber of volatility if used well.
That’s why the expectation is that reinsurance and insurance players continue to find sophisticated ways to integrate third-party capital into their business models, given it is an elastic source of capital that can help moderate PML’s and exposures, while also returning a fee income to them.