Price improvements “selective” in reinsurance & ILS: Hiscox CFO

While price momentum continues to build in the Lloyd’s market, improvements in pricing seen in the reinsurance and insurance-linked securities (ILS) market are “more selective”, according to Hiscox CFO Aki Hussain.

Speaking following last week’s trading update, in which Hiscox warned that loss creep from typhoon Jebi and hurricane Michael is going to dent its half-year results when it reports them soon, Hussain explained that while the rate environment is better, it’s not across the board.

The comments reflect others, as well as the general trend of cedant differentiation that emerged at the mid-year reinsurance renewals.

Which all reflects the fact that the reinsurance market cycle is more localised, in terms of hardening, with performance as important as loss activity and geographic hardening to be expected more than market-wide.

The growth of alternative reinsurance capital has helped to instil this more rational pricing environment, as competition has increased as well as efficiency meaning that broad-brush rate rises are becoming a thing of the past.

That provides greater value to cedants, rewards those who perform well and for the shareholders of re/insurers and the investors in ILS, it provides a more risk commensurate return opportunity, while protecting better against the downside as well.

Hussain commented on price trajectory, “We are seeing positive pricing momentum in London market, which unlike last year is continuing to build. In reinsurance and ILS, pricing improvements are more selective.”

The benefits of better pricing do not manifest immediately in re/insurer results though, hence it is the end of this year and into the following that we’ll get a better view of the difference it has made to portfolio returns.

Hussain said, “We expect some of this positive impact to come through into our results in the second-half of the year, but predominantly into 2020.”

Hussain said that while pricing has been rising Hiscox has also been shaping its portfolio to reduce risk, as well as improving terms and conditions which should result in a better performing book.

“With respect to our reinsurance and ILS book we have reduced our appetite for the risk aggregate product. This is something that we started, I think four or five years ago.

“It’s not gone quite in accordance with our expectations. So we’ve pulled back, and we’ve repriced and significantly cut back on the premium in that area,” he explained.

As a result, he said that revenue comparative to the prior year should improve a little as a result of actions taken.

He continued, “We’ve had a good 1/4, where on loss affected lines we saw rates increase significantly for our Japanese renewals. We’ve also had an improved 1/6 with the Floridians, where again we’ve achieved some price increases.”

Adding that, “We haven’t increased our positions, our exposure, but we have received more premium.”

Reinsurers are having to work harder to make the most of improved rates this time around, as while there are price increases available it is by improving the performance of the book that real and sustained profits can be made.

Hence terms and conditions continue to be key to the return potential of a reinsurance or ILS portfolio.

Which in time should also mean we see greater differentiation between results, as the better underwriters and those with more discipline may stand to make the more sustainable returns for their investors and shareholders.

Hiscox also confirmed to our sister publication Reinsurance News that it has been claiming on its aggregate reinsurance, with the hurricane Michael loss creep eating into this layer of its program in the second-quarter.

Hiscox told us that it expects any further loss creep to be contained within this aggregate reinsurance layer.