There are more downside risks for the reinsurance industry today than there were six months ago, as the sector risks giving up more ground before finding a floor on catastrophe reinsurance pricing, said rating agency Moody’s recently.
In an article by Vice President Kevin Lee, of Moody’s Global Insurance Group, the ratings agency maintains its stable outlook on the reinsurance industry but warns that the downside risks are growing and remain much higher than six months ago.
Moody’s believes that the amount of traditional reinsurance capital appears to be roughly holding steady but the amount and, perhaps most importantly, the value proposition of alternative reinsurance capital keeps growing.
Moody’s sees a downside risk that catastrophe reinsurance pricing continues to decline and it takes longer than expected to find a floor. Moody’s notes that the average reinsurer in its rated universe sees catastrophe reinsurance making up approximately one-quarter of its premiums and as much as half of its underwriting profits.
The June, particularly Florida, reinsurance renewals will provide a real test of reinsurers discipline, according to Moody’s. Reinsurance underwriters had generally expected that last years June price decline would carry over into January and perhaps April renewals. However Moody’s notes that further price cuts in June will likely set in motion further price declines for the following January reinsurance renewal season.
The fact that reinsurers are competing so strongly on price to maintain market share is an issue raised by Moody’s, as it notes that smaller reinsurers are protecting market share fiercely for fear of shrinking to irrelevance. This is one potential trigger for reinsurance mergers & acquisitions, particularly among the catastrophe reinsurance focused, Bermuda set.
Lee writes that Moody’s believes that alternative capital will not just continue to flow into the catastrophe reinsurance space, but will continue to evolve and narrow the gap between traditional reinsurance products and collateralized limits. Moody’s notes that one change which will drive further growth in ILS is a push to use fronting arrangements, allowing collateral to be reduced to below 100% while some leverage can be gained for ILS managers thus allowing some level of reinstatement to be offered.
On the other side traditional reinsurers are increasingly moving into the ILS space by managing third-party capital and establishing their own collateralized reinsurance vehicles or funds. However, Lee rightly notes that with reinsurance demand roughly flat reinsurers need to take market share from competitors for their third-party capital units or risk simply taking from their own traditional underwriting side.
Like others, Moody’s notes that alternative capital influence in reinsurance is set to spread. Lee writes; “We believe that price pressure on catastrophe reinsurance will likely spread to other business lines as a portion of the displaced property cat capital will move into casualty or specialty lines. Momentum is also building for more alternative capital to enter casualty lines in the wake of Arch Capital’s casualty sidecar, Watford Re.”