P&C profit pressure, Jan renewal outcome to drive reinsurance rates: KBW

While major global catastrophe loss activity in the fourth-quarter wasn’t particularly significant, attrition from global large losses and Japanese typhoons, as well as dented profitability in general, plus the outcome of January renewals, is all expected to help drive reinsurance rates higher through 2020.

Analysts from KBW noted that overall loss trends continue to worsen in global property and casualty insurance, which on top of weakened underwriting margins and lower interest rates will all play into ongoing pressure on profits.

At the same time while typhoon Hagibis has been the largest international loss to impact the market through the fourth-quarter, a range of other loss events around the globe have also dented profits, such as the Chilean protests and Australian wildfires.

On the back of this KBW’s analysts expect aggregate reinsurance claims in some quarters, as some international P&C re/insurers may sustain sufficient losses to trigger their coverage. This could apply to some Lloyd’s syndicates as well, the analysts explain.

Concerns over deteriorating loss trends in casualty and liability lines has not gone away and in some corners will likely accelerate as fourth-quarter earnings come in, while at the same time net reserve releases are likely to fade.

Topping it all off is an expectation of worsening U.S. and global crop insurance claims as well, all of which points to a chance of more reinsurance support being required.

“Pricing trends reflect line-specific expected returns that we think have mostly deteriorated enough to spur rate increases,” KBW says and with no sign of the deterioration in underwriting profits improving significantly and reinsurers set to continue supporting the P&C market, these pricing trends are likely to persist.

On the other side, while reinsurers are called on to support the global P&C market loss activity and lack of significant performance improvement, the same reinsurers are facing challenged retrocession conditions including higher pricing themselves.

Another factor that continues to suggest rate pressure in reinsurance will persist and while perhaps not yet a hard market, 2020 is likely to see some continued firming as a result.

“We expect January 1 reinsurance renewal pricing reviews to discuss rising retro rates that should drive higher catastrophe reinsurance pricing during upcoming April and June/July renewals,” KBW’s analysts forecast.

KBW estimates that Q4 2019 global catastrophe and large loss activity will cost the industry around $19.2 billion, with typhoon Hagibis the largest event which the analysts cite at $9 billion, followed by the Chilean riot activity with an insurance industry loss of $4 billion and then the Australian wildfires at somewhere getting closer to (and likely to surpass) $1 billion.

Large insurers, including examples such as AIG, Travelers and Hartford, may leverage their aggregate reinsurance coverage in support of paying claims through 2019.

KBW’s analysts note that they would expect the cost of these aggregate covers to increase in 2020 in response to claims activity on them.

On the reinsurance renewals, KBW highlights the supply-demand mismatch, in terms of capacity available particularly in retrocession, saying they expect this to, “persist throughout 2020, especially for loss-impacted property-catastrophe accounts.”

“We expect material rate increases in future 2020 reinsurance renewal periods, with recurring Japanese typhoon losses and persistent loss creep on past Florida events driving higher pricing at 4/1 and 6/1, respectively,” they explained.

As we explained yesterday, in this article, the outcome of future renewals will depend on some factors, including insurance-linked securities (ILS) capital inflows to funds, as well as large traditional reinsurer appetite to compete prices down.

These have together been the softening element of the renewal equation in recent years and it will be interesting to see how disciplined this market can remain through April and June/July 2020.

Read all of our reinsurance renewals coverage here.