The 2013 Atlantic Hurricane Season, now officially over, will go down in the records as a season resulting in a particularly low-level of insured losses. Ratings agency Fitch said yesterday that it believes the benign hurricane season will exacerbate reinsurance rate declines.
Fitch said that it expects the quietest hurricane season in decades will lead to a double-digit decline in catastrophe reinsurance pricing at the key 2014 reinsurance renewals.
On the flip-side, the lower catastrophe loss burden faced by reinsurers as a result of no meaningful U.S. hurricane losses will buoy industry earnings for 2013, but Fitch expects reinsurers will return much of this extra profit to investors through more dividends and share buybacks, rather than using it to boost capital. With capital levels strong in the sector there is a lack of new opportunities to deploy this profit, meaning that the best use of it is to return it to investors at this stage, according to Fitch.
This gloomy outlook is in many ways one which has been casting a shadow over reinsurers right the way through 2013. The 2012 hurricane season did not cause heavy losses for the industry either and with the build up of interest from third-party and alternative reinsurance capital in catastrophe reinsurance business there is currently no reason to believe rates will go anyway but down across peak catastrophe zones, particularly U.S.
Fitch said that the fact that we saw no major hurricanes at all in 2013, in a season with the fewest named storms since 1982, will maintain pressure on U.S. catastrophe excess of loss reinsurance pricing. Fitch notes that pricing here is already signficantly weakened due to the participation of capital markets investors through catastrophe bonds, insurance-linked securities (ILS) and other reinsurance alternatives.
Fitch forecasts a similar decline in pricing as was seen in mid-2013, as well as a further improving of terms for reinsurance buyers as they pressure reinsurers into providing more attractive products. Fitch expects double-digit price drops as well as the availability of larger limits, multi-year agreements and better terms on the reinstatement of cover for protection buyers.
Fitch notes that not every peak catastrophe zone will experience the same. Some regions have been affected by losses, such as wind storms and flooding in Europe, Canada and Australia, and that these affected regions will likely see more stable pricing.
Loss affected lines of business may see some price rises, Fitch says, while unaffected international catastrophe reinsurance lines should see these losses helping to limit price softening to a single-digit drop.
Fitch expects reinsurers will maintain underwriting discipline in 2014 and will not look to increase capacity further on catastrophe exposed programmes in the U.S. or internationally.
The lack of large catastrophe losses from hurricanes is certainly a factor in recent catastrophe reinsurance pricing trends, but ILS and alternative capital is perhaps as big an influence on pricing currently. With ILS players suggesting that catastrophe risks remain attractive to them even after more expected price declines in January this pressure on traditional reinsurers is unlikely to go away in 2014.
Traditional reinsurers may have to find structural ways to make U.S. peak catastrophe reinsurance risks a less fundamental part of their business, either by leveraging more efficient sources of capital to underwrite these risks with (ILS and alternative capital) or by exiting the space entirely to focus on more profitable lines.
Some reinsurers are already going down this route. The question will be whether some reinsurers, which are more exposed to these market forces, can maintain profits at their current expense levels after effecting structural changes, or whether we will see some downsizing of key players in years to come.