The deterioration in property catastrophe insurance and reinsurance pricing, which has been exacerbated by excess traditional reinsurance capital and growing alternative capital, has “yet to reach a bottom,” according to analysts at Morgan Stanley.
Pricing across the property catastrophe reinsurance has been in a state of decline for two years or more and the commercial property insurance market has seen rate increases decelerate to a level where that market is now considered flat.
Equity analysts from Morgan Stanley & Co. LLC, led by Kai Pan, suggest that there is more room for rates to decline, particularly as alternative reinsurance capital and insurance-linked securities (ILS) continue to compete for core property lines and perils.
“Property cat reinsurance pricing is under great pressure from alternative capital and the market has yet to reach a bottom,” the analysts wrote in their latest report on P&C insurance and reinsurance market trends.
The expectation is that the continued decline in pricing will result in pricing running at or below the technical levels required for insurers and reinsurers to maintain margins, according to the analysts, which will exacerbate pressure on companies through 2015.
“With pricing running at/below loss cost trend, we continue to expect core margin deterioration in 2015 but note that loss trends continue to run below expectations,” they explained.
That last piece, on loss trends running below expectations, is important. How insurers and reinsurers margins will respond should catastrophe losses return closer to normal levels will be interesting to note, with a significant probability that some companies could experience a real hit to profitability at that time.
The analysts at Morgan Stanley expect the headwinds for commercial property insurers to accelerate this year, saying; “U.S. commercial lines pricing flattened at YE14 after 3 years of solid improvement and could dip into negative territory in 2015.”
In fact, across the entire P&C market, so primary and reinsurance, Morgan Stanley says; “We expect fundamental headwinds to persist due to continued core margin pressure, thinner reserve cushion, and persistently low investment yield.”
At the same time as these pricing headwinds looks set to persist, there is also pressure on the volume of premiums available for underwriting. The analysts note that in primary insurance companies are at least aiming for top line growth, so premiums have continued to rise despite increasing pricing pressures.
In reinsurance however, the analysts cite premiums shrinking, reflective of the trends that have resulted in primary insurers pulling back on reinsurance purchases, retaining more risks, or re-structuring their reinsurance buying resulting in a lower premium spend.
Morgan Stanley’s analysts estimate that U.S. property catastrophe reinsurance premiums were down around 11% at the January renewals and that net written premiums were down approximately 14% in Q4 2014.
So yet another report from equity analysts reiterates and reinforces the view that headwinds aren’t slowing. In fact they have further to go and the pressure is likely only just being felt. For it is further down the road, as premium shrinkage, pricing declines and reserves slowing all combined to hit insurer and reinsurer return on equity that the real impact of this softening market will become clearer.
The recent trend to watch, however, could be as ILS fund managers increasingly get to grips with accessing insurance business through fronting carriers. If business starts to shrink meaningfully from yet another side of the market traditional reinsurers will find the pressure on them rises once again.