Post-loss rate rises to be more durable in primary lines: Morgan Stanley


While the record levels of third-quarter catastrophe losses are expected to “crystalize a turning point” by the equity analysts at Morgan Stanley, the team believe that this any post-loss turn in rates will be more durable in primary insurance lines than in reinsurance or retrocession.

The analysts do expect to see a turn in pricing for the global reinsurance industry, with catastrophe exposed and loss affected business likely to see the greatest increases, but the durability of any rate increases in reinsurance lines remains questionable.

The recent catastrophe losses serve to remind the industry of potential underwriting risks they face and the resulting calls for rate rises are to be expected after such large losses.

Property catastrophe reinsurance and retrocession providers are the most bullish on price increases, Morgan Stanley’s analysts note, with rate increases in the double-digits wished for by many.

But these companies may find their opportunity to underwrite at these higher rates relatively short-lived, if the market returns to a more benign (or expected) loss environment and the weight of capital continues to build.

For with reinsurers still able to return capital, rather than put it to work, it seems clear that there is capacity to spare in the sector still, even after such large losses, which suggests the return to softening may not take all that long.

On the primary side though the pricing outlook is considered brighter, with primary commercial insurance giants all calling for rates to increase as well.

In this market the analysts expect that any rate increases will be more gradual, but as a result more durable over the longer-term.

This could be interesting for alternative capital and ILS fund managers, as an increasing number look to catastrophe exposed primary property lines of insurance business as a way to source risk from closer to the source, while dealing with fewer layers of intermediation.

ILS funds are already accessing primary property business in excess & surplus lines, commercial property and coastal residential markets, backing MGA-sourced portfolios of risk with their reinsurance capital, or through syndicate deals at Lloyd’s.

For those ILS funds with the infrastructure to achieve this a more durable pricing uplift may be possible it seems, while they will also benefit from any reinsurance and retrocession price increases as well, no matter how short-lived these may be.

If the primary markets do see a more enduring price hike after the recent catastrophes it could also encourage other ILS funds and sources of alternative capital to venture into these areas, attracted to the potentially higher margins on offer to them.

By more directly placing their capacity behind portfolios of catastrophe exposed property risk, ILS fund managers and their investors can benefit through being further up the value-chain and closer to the original risk.

More durable pricing could be a significant factor in attracting more ILS capital into this area of the market over the coming years.

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