Muted pricing response to losses a test for carriers & investors: JLT Re

The capital resilience of carriers and reinsurance appetite of third-party investors is being tested by the muted renewal pricing response to two years of elevated losses, according to broker JLT Re.

Following two consecutive years of significant catastrophe events, that between them added more than $200 billion of losses in an 18 month period, JLT Re says that further major loss years could really test the appetite and capital adequacy of the market.

It’s not just investors in insurance-linked securities (ILS) and other collateralized reinsurance products that find themselves tested either.

The broker suggests that reinsurance carriers own appetites for underwriting risk at still lower pricing levels are being tested, given the muted pricing response seen at the renewals again.

At the renewals there was evidence of dampened reinsurer appetites, resulting in some market tightening where there had been losses, JLT Re said.

But as we have pointed out before, the renewals also saw major reinsurers soaking up non-loss affected business in diversifying regions, such as in Europe and Asia-Pacific (ex-Japan), at rates that sometimes appear barely commensurate with the risk they are underwriting, hence the appetite of reinsurers is not as clear-cut as it seems.

With clarity lacking around loss development, as we’ve seen from the ongoing loss creep from 2017 hurricanes and more recently from typhoon Jebi, and the adequacy of pricing, JLT Re says that pressures in reinsurance are likely to persist in 2019, despite the strong capital levels that still exist.

But the dynamics witnessed at the key January renewals do provide some key indicators as to what to expect as 2019 continues.

“The 1 January renewal provides an early glimpse into how the reinsurance market is likely to develop in 2019,” explained Ross Howard, Executive Chairman & Interim Global CEO, JLT Re.

“Whilst the property market continues to garner the headlines, changing dynamics in the casualty space are shaping up to be a prominent feature of the year. After years of largely favourable conditions that included a benign inflationary environment and historically low loss experiences, increasing claims severity, social inflation and instances of adverse reserve development are now hurting carriers and point to a market in transition.”

Here the reinsurers find they can set the pricing more to their tastes, as there isn’t yet a significant influx of alternative capital into the casualty sector and as a result the market forces are not the same as the property insurance and reinsurance market, or certain specialty lines.

JLT Re said that there were “a myriad of competing factors” which conspired to restrain price movements in the majority of reinsurance business lines at the renewals.

Crucial to the outcome, in terms of pricing, is the traditional reinsurance market’s “overriding desire and ability to underwrite risks,” the broker continued.

There is evidence of market tightening in some areas, JLT Re said, where reduced appetite and increased demand are the factors helping to increase pricing.

But this is largely only seen in areas of the market that suffered sizeable losses (so certain property catastrophe zones) or where performance has been poor in recent accident years, including the U.S. casualty market.

JLT Re believes that the high level of losses since the middle of 2017, loss creep that continues to be seen, the reduced inflows into insurance-linked securities (ILS) investment vehicles, and the reduction in capacity available for underwriters in the Lloyd’s market, will resonate through 2019 and drive market equilibrium and pricing forces.

But, “Historically high levels of excess capital will nevertheless continue to weigh against these dynamics, and this has long been the dominant reinsurance pricing driver,” the broker said.

Another key factor for 2019 will be how quickly ILS funds and collateralized reinsurance vehicles can deal with their trapped capital from events of the last two years, as this will also help them to unwind and move forwards with any funds that can be recovered or where initial side pockets proved larger than needed.

On top of this the launch of new ILS start-ups and a number of established players that did not face such significant losses as to deter their investor-base all promise to bring more capacity into the market if underwriting conditions are improved, or just attractive enough to grow their portfolios.

It’s going to be an interesting time for both the ILS market and traditional reinsurers, with the latter also increasing its use of third-party capital all the time as well, bringing more new capital into shorter-tailed lines as a result.

The upshot is an uncertain outlook for the renewals for the rest of 2019, with the potential for some price improvements but perhaps dwindling optimism over just how big any increases could be.

David Flandro, Global Head of Analytics, JLT Re, commented, “Such a backdrop, coming at a time of macroeconomic transition and capital market volatility, leaves the reinsurance market delicately poised as it enters 2019. With attention already focused on key renewals dates later in the year, it is crucially important for reinsurance buyers to have detailed insights into key market drivers.”

So for the ILS market and its investors another large loss year is seen as the main threat to inflows, as this could test “investors’ appetite for reinsurance at a time of capital market volatility,” JLT Re says.

For traditional carriers the spectre of more volatile markets and a shifting macroeconomic environment could add some pressure, testing their capital resilience.

“Carriers’ balance sheets could also come under additional strain as the economic cycle shows signs of shifting for the first time since the immediate aftermath of the financial crisis. Reserving trends and asset leverage remain key sector drivers. After a prolonged period of low yields and disinflation, the spectre of sudden movements in interest rates and asset prices brings important supply implications,” JLT Re concluded.