Swiss Re Insurance-Linked Fund Management

Xactanalysis Insights and PCS

Reinsurance price deterioration could persist into 2018: Moody’s


In a recent interview with Artemis, Moody’s Investors Service (Moody’s) said that it expects pricing in the reinsurance industry to decline by up to 5% during 2017 and possibly decline in 2018, highlighting a continuation of the myriad of industry challenges.

Moody's Investors ServiceReinsurance industry players have noted further, albeit moderated price declines at the key January 1st 2017 renewals, a trend that Brandan Holmes, Vice President (VP), Senior Analyst at Moody’s, told Artemis he expects to continue in the coming months.

“We expect reinsurance prices to fall by 0% to 5% during 2017, and possibly into 2018. Ample supplies of alternative capital, including meaningful amounts waiting on the sidelines for pricing to improve, will likely cap any meaningful price increases, at least over the medium term,” said Holmes.

Despite global, insured catastrophe losses in 2016 being the highest of the last four years, at a reported $50 billion, the highly competitive and overcapitalised state of the reinsurance market means that a truly substantial volume of capacity is likely required to exit the space before pricing starts to turn.

Further, yet reduced price deterioration was expected at the key 1/1 2017 renewals, and as well as suggesting this trend could persist into 2018, absent a major catastrophe, Holmes told Artemis that Moody’s sees no catalyst for a meaningful capital reduction in 2017.

Times are challenging for global reinsurers, both the traditional and the more alternative market players, but the relatively benign loss experience and strong reserve releasing has enabled companies to keep their return on equity (ROE) above their cost-of-capital, for the most part, explained Holmes.

“ROE for Moody’s-rated reinsurers fell to 8.4% in Q3 2016 from 12% in 2013. We expect further deterioration in normalized ROEs (i.e. adjusted for expected nat-cats and reserve releases) during 2017, with normalized returns falling below many reinsurers’ cost of capital,” said Holmes.

Exacerbating the negative impact of persistent price declines in the reinsurance sector, Holmes also told Artemis that the ongoing low interest rate environment would continue to hinder investment returns, suggesting that rates need to increase by 200 to 300 bps above current levels to reverse the current yield environment.

However, while rising interest rates would likely alleviate some of the pressure on investment income over time, Holmes explained that it could “also increase the risk of claims inflation.”

Amidst the challenges, demand for reinsurance throughout 2016 increased slightly, according to Moody’s, and the financial services firm expects demand to continue to rise modestly in the coming months, which, as in 2016, could help to slow the rate of price declines in the sector.

Insurers took advantage of the buyers market landscape and utilized a greater volume of efficient reinsurance capacity to reduce earnings volatility, while the larger reinsurers saw increased demand for private, bespoke transactions in 2016, another trend Moody’s expects to continue in 2017.

“Based on Moody’s reinsurance buyer survey, published in September 2016, 24% of cedants plan to buy more property reinsurance in 2017, and 19% expect to purchase additional casualty cover,” explained Moody’s.

Alternative reinsurance capital continued to expand in 2016, albeit at a slower pace than in previous years, and while the additional glut of efficient capacity undoubtedly adds to pricing pressures, its size, permanence, and influence continues to provide reinsurers with an opportunity.

Holmes said; “As investors become more sophisticated and increasingly familiar with alternative capital structures, we expect that they will make a meaningful move into non-property lines, further increasing pricing pressure. At the same time, many (re)insurers are becoming more comfortable with deploying third-party capital in their own capital structures, in an effort to lower their blended cost of capital.

“The UK regulator’s focus on facilitating the issuance of alternative capital and insurance-linked securities (ILS) in London could broaden investor participation in alternative insurance capital.”

With the series of reinsurance industry headwinds expected to continue Moody’s feels that the incentives for industry merger and acquisition (M&A) activity remains high, “given reinsurers’ profit expectations and changing cedant behaviour.”

In recent times reinsurance industry M&A has mostly come from larger, more diversified companies acquiring mid-tier reinsurers, which Moody’s says helped to alleviate some of the cyclical pressures felt by the less diversified players.

“Increased scale and market presence offer opportunities for reinsurers to bolster profits through operational efficiencies, and also enhance their appeal to cedants,” said Holmes.

“We also expect the changing market place to encourage more research and development, expanding new and existing insurable risks (e.g. cyber (re)insurance and solutions),” he concluded.

With the possibility that price declines in the global reinsurance market could persist into 2018 it might not be too long before some in the space see their profitability diminish fast, as ROEs fall further and combined ratios increase.

Thinning reserves and normalised catastrophe losses exacerbate the situation for global reinsurers, so it will be interesting to see what companies do to try to navigate the ongoing, softening landscape throughout 2017 and beyond.

Read previous Artemis interviews here.

Join Artemis in New York on February 3rd 2017 for ILS NYC
Artemis ILS NYC 2017

Register today for ILS NYC 2023, our next insurance-linked securities (ILS) market conference. Held in New York City, February 10th, 2023.

Artemis London 2022 - Insurance-linked securities conference in London

Get a ticket soon to ensure you can attend. Secure your place at the event here!

Print Friendly, PDF & Email

Artemis Newsletters and Email Alerts

Receive a regular weekly email newsletter update containing all the top news stories, deals and event information

  • This field is for validation purposes and should be left unchanged.

Receive alert notifications by email for every article from Artemis as it gets published.