Primary U.S. property rate rises bode well for value chain disruptors

The direction of insurance and reinsurance rates is a constant source of discussion and it’s beginning to seem that those ILS funds and reinsurers who look to shorten the risk-to-capital value-chain may benefit most, as rates are still rising in primary property underwriting business.

Reinsurance rates for property catastrophe risks did not respond as the market had hoped, following the major hurricanes and c catastrophes of 2018, with just small increases in January, although loss impacted accounts did move more, and more stability reported at the April renewals.

The expectation is that June and July reinsurance renewals will be similar, with only the most loss-affected accounts and regions with poor claims history seeing rate rises, while the rest of the renewals are anticipated to be relatively flat, to even down slightly.

With not much chance of market-wide reinsurance rates increasing very much, as the market remains very well-capitalised and the capital markets backed ILS funds continue to exert their efficiency and lower costs-of-capital, there might be benefits to be had for those that are aiming to disrupt the insurance market value chain.

According to MarketScout rates are rising across U.S. property insurance markets in both commercial and personal lines business.

For the first-quarter of 2018 the company reports that commercial property underwriting business saw a rate increase of +3% year-on-year, not dramatic but against the backdrop of more stable reinsurance rates this suggests primary companies and those targeting placing their reinsurance capacity more directly behind primary books of business have benefited from continued pricing improvements.

It’s the mid-sized commercial accounts that have been seeing the largest rate increases as well, which for ILS players or reinsurers are typically only accessible through relationships with broker networks, MGA’s and other intermediary facilitators.

That’s exactly the area of the property market that some ILS funds and other collateralised reinsurance players target through relationships with MGA partners, or via Lloyd’s market access to non-admitted and excess & surplus lines business.

So for those ILS players that are looking to shorten the markets risk-to-capital value chain, there could be a chance to capitalise on better rates in primary business than they might find in the reinsurance market. Add in the additional margin that can be earned by moving their capacity up the value chain and it’s very clear why this strategy is becoming more widespread.

On the personal lines side of U.S. property the prospects also bode well for any ILS players that are working with brokers or wholesalers to access and reinsurer catastrophe exposed U.S. property insurance books.

Here MarketScout reports that composite homeowners rates increased 3% in the first-quarter but the difference between loss affected and those experiencing claims were stark.

Richard Kerr, CEO of MarketScout, explained, “Homeowners insurers are focusing on geography and claims history. If you live in Miami and have experienced claims, your rate increase could be as high as 15 percent. Conversely, if you are a long-term customer with no claims and live in Denver, you might see a rate decrease of 5 percent.”

With ILS players typically looking for catastrophe exposed property risks, often coastal, and after the hurricanes of last year, this suggests that shortening the value chain and backing primary portfolios of risk more directly could earn a better premium increase.

As if these increases are not flowing through to reinsurance renewals primary insurers will be getting an arbitrage opportunity, presented to them by the well-capitalised and efficient reinsurance market.

Enterprising capital markets and ILS players might as well try to soak up the margin available themselves, by bringing their risk capital more directly behind large portfolios of catastrophe exposed personal and commercial property underwriting business.

While primary companies are making the most of rate increases it is also possible that we could see this helping to drive catastrophe bond issuance as well, with cat bonds offering an efficient source of reinsurance and a way for primary insurers to balance their coastal and peak exposures absorbed by underwriting property business that has seen the highest rate increases.

Alternative capital has been increasing its focus on commercial property risks through intermediary relationships, Lloyd’s and other channels. We’d expect to see the capital markets looking to back primary portfolios of property risk as directly as possible in future as well.

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