Reinsurance pricing momentum is forecast to continue through all of the 2021 renewal seasons, with rises of 5% to 6% expected across the key upcoming January renewals, according to analysts at Morgan Stanley.
The analysts believe that pricing in reinsurance is now back in-line with levels last seen in 2013, which it deems the last time the reinsurance market was seeing hardening pricing.
Analysts at Morgan Stanley said in a recent report that strong price improvements seen through 2020 are expected to persist and market sources suggest hardening is accelerating at the January renewals.
Perhaps more importantly though, the analysts believe that pricing momentum being seen in reinsurance in the run-up to January, is likely to carry through to the later renewals in 2021, so including the April renewal with its focus on Japan and the June and July renewals, with their Florida and U.S. reinsurance focus.
The analysts forecast rate increases in the 5% to 6% range across the January reinsurance renewals, before terms and conditions.
If that ends up being accurate, it will be the hardest reinsurance market in years, as some areas will remain much flatter, so an average of up to 6% across the market will be a considerable uplift to reinsurers and ILS funds portfolios going into the new year.
Similar levels of pricing momentum are forecast for the later renewals in 2021, which if true will mean much better pricing in Japan, Florida and the U.S., elevating once again the return potential for ILS funds.
Again, the analysts note that reinsurers really have no option but to support price increases now, as without rate their returns on equity (ROE) will not be sustainable.
The quality of earnings are set to improve then, as reinsurers look to deliver much more of their profit from the underwriting side of their businesses, as investment yields look set to remain so low, again a signal for better return potential in ILS fund and collateralised reinsurance portfolios.
It is no surprise then that private equity capital has been piling into reinsurance at this point in the cycle, as the opportunity for short-term (2 to 5 year) profitable exits are clearly the highest seen for a decade or more.
This capital will demand performance, as it will demand impressive returns on exit. Which also means those having raised PE money, or start-ups backed by it, will have to support the push for higher rates, or find another way to enhance their ROE’s.
All of which reads across to profitable opportunities in ILS funds and collateralised reinsurance vehicles for investors, with market conditions perhaps looking set to stabilise for a time.
This also represents an opportune moment for the catastrophe bond market to exert its ability to deliver efficient reinsurance and retrocessional capital to traditional market players and large corporate risk transfer buyers, as cat bond coverage continues to look a very efficient alternative in this hardening market environment.
It should be noted though, that there is some concern among market sources that rates may not harden as much as hoped for at January 1st now, as the market begins to digest the increased capital levels and appetite of some private equity backed players and new start-ups.
The momentum may continue and at the desired trajectory, but it may be at a slower rate than was hoped for just weeks ago, it now seems.