Global reinsurance firm Swiss Re expects that property catastrophe reinsurance pricing will remain under pressure through 2015 renewal seasons, due to the continued abundance of capacity and low-level of catastrophe losses.
Speaking today during Swiss Re’s annual economic outlook media briefing, executives from the firm suggested that the difficult conditions in global property catastrophe reinsurance are set to continue, as both the industry and macroeconomic factors that affect pricing show no signs of changing.
Swiss Re’s senior economist Roman Lechner said that the softening we now see spreading across the property catastrophe reinsurance market began as U.S. property catastrophe rates began to soften in mid-2013. This softening trend spilled over into other regions and also some other lines of reinsurance business at the January 2014 renewals.
Following this the June and July 2014 renewals saw broad softening of the reinsurance market, with property lines of reinsurance business down -10% to -15%, property catastrophe down -10% to -20% and liability reinsurance lines down -5% to -20%.
Looking ahead, given the continued abundance of both traditional and non-traditional reinsurance capital and the continued expansion of the insurance-linked securities (ILS) market, Swiss Re sees no let up in the softening of reinsurance prices.
Property catastrophe reinsurance pricing is expected to remain under pressure at the 2015 reinsurance renewals, as long as capital levels remain strong and catastrophe losses remain low.
Across casualty and specialty reinsurance lines of business Swiss Re expects that the softening trend will be more variable, with significant differences in price development by market and line of business expected to be witnessed at renewals through 2015.
It’s not just reinsurance either. Swiss Re expects the hardening seen in primary insurance markets and lines of business will continue to taper in 2015, citing Marsh’s expectation that stable to softer rates would be seen across the board, except for in catastrophe exposed property in Germany, Canada and Japan, motor in Germany, France, US and UK general liability.
Another factor affecting reinsurers that has perhaps been boosting performance and lowering their combined ratios in recent years in positive reserve releases. Swiss Re believes that positive reserve releases will begin to decline, so the contribution they’ve been making to combined ratios will start to diminish. However it is hard to forecast when these reserve releases will disappear completely, but it is safe to assume that reserves will make a reduced contribution to low combined ratios in years to come, especially as the releases have been so large in recent years.
Perhaps offsetting some of the lost profitability of established reinsurance business is the emerging market growth opportunity. Swiss Re cites an expectation that there will be continued premium growth of insurance across emerging markets, particularly in non-life classes of business.
Economic growth stimulates growth in insurance penetration, but the current economic environment is also expected to affect the asset side of the business, making profitable expansion into these markets perhaps more tricky.
“Stronger economic activity will improve insurance premium growth, particularly in the emerging markets,” commented Kurt Karl, Swiss Re Chief Economist. “But profitability will still be challenging because of the low investment yields.”
Growth is likely to improve in all emerging markets in 2015 and premium growth is expected to remain robust for non-life risks through 2016 as well. As these premiums grow there will be an increased demand for reinsurance capacity in some emerging markets as well, which is sure to become an increasing focus for large reinsurers, like Swiss Re, as they seek to offset the expected continued pressure on rates across mature reinsurance markets and lines.
In terms of non-traditional or alternative reinsurance capital and ILS accessing the reinsurance market, Swiss Re’s chief economist Kurt Karl said that they are waiting for interest rates to go up so that they can see whether investors remain excited about accessing reinsurance business, particularly U.S. catastrophe business.
Swiss Re is also waiting to see a large catastrophe event to see how ILS capital reacts. “It is untested in that respect,” commented Kurt Karl. He also said that ILS and alternative capital has been “Lucky so far” and perhaps has had it easy, as the catastrophe loss environment has been relatively benign in the last few years and we haven’t seen any major hurricanes.
Given the record high levels of capital among traditional reinsurers we would suggest that with the widely held expectation that ILS capital is here to stay and that while some investors may leave the market if interest rates spike or a major loss event occurs, the above may make little difference to the pricing environment anyway.
To us the softening of reinsurance rates does not just reflect the entry of new capital into reinsurance, it also reflects the structural and secular changes being seen across the market, many of which are only just beginning.
Beyond 2015 renewals Swiss Re expects that the rate of price declines in reinsurance will decelerate, as lines of business are getting close to profitability levels. However, there remains no sign or reason to expect them to reverse at this time.
So the outlook for reinsurance firms for the 2015 renewals remains gloomy, in terms of rates. That will make efficiency, cost of capital, expense ratios, maintaining discipline and holding back on areas deemed unattractive in terms of pricing as important as ever.