Not a supply driven hard market, further gains expected: Flandro, HX

The current hardening of reinsurance rates is not being driven by any supply of capital related factors, unlike previous firming, which alongside a number of other catalysts means that further rate gains are to be expected, although it’s more challenging to tell how much, David Flandro of HX Analytics explained recently.

Speaking with analysts from Morgan Stanley and their clients, David Flandro explained that he believes there are plenty of catalysts to suggest that reinsurance rates will continue to firm at the mid-year and potentially beyond into 2022.

While capital is not low, in the same way as previous hardening of the reinsurance market, in addition Flandro said that balance-sheets are arguably less stretched as well.

However, while less stretched on a capital and operations basis, reinsurance companies are facing greater constraints on the profitable deployment of their capacity than perhaps ever before, driven by requirements of rating agencies and entities such as Lloyd’s, Flandro explained.

All the while low investment yields means that lever has gone for reinsurance profit making, which is driving the need for reduced combined ratios and higher underwriting profits, if reinsurers are to make adequate returns.

These factors, along with changes in risk perception due to climate risk, increased catastrophe losses and rising secondary peril costs, as well we’d add as social inflation trends, are all seen as catalysts to the firming being seen, by Flandro.

Rates still vary by line of business as well and Flandro noted that further improvements are required in property lines in particular.

Only the retro market is seeing true hard market conditions so far, Flandro believes.

As a result, Flandro sees plenty of support for better reinsurance pricing at the June and July mid-year 2021 renewal season.

In fact, he actually expects that more favourable improvements in pricing may be seen at the mid-year than in January or April, largely due to catastrophe losses, exposure and the coming hurricane season.

The midwest Derecho of 2020, the rising impacts of wildfires in recent years and the February winter storms and deep Freeze in Texas are all seen as further catalysts for steeper rate increases at the mid-year.

We’d add that the ongoing litigation trends and challenges in the Florida market are another specific catalyst for the June renewals to see more firming.

Will it be a hard market at the mid-year? That remains to be seen.

Right now, it seems the only re/insurers that will struggle to afford their reinsurance, at levels they’d ideally like to be buying, will be some of those in Florida.

So perhaps not hard, but definitely still firm and it would be a much healthier reinsurance market environment if firming continues until the industry can truly cover its loss costs, cost-of-capital, expenses and a margin.