Reinsurance pricing momentum through renewals in 2020 is expected to range between flat to moderately rising, according to findings from Moody’s Investors Service.
Respondents to Moody’s reinsurance buyers survey said that they anticipate a flat to firming market at the next renewals in 2020, given both insurers and reinsurers need to reassess their risk adjusted returns after catastrophe loss years and now rising casualty claims as well.
“While reinsurance demand has grown over the past two years, most cedants foresee no meaningful change to their reinsurance buying in 2020, and are focused instead on tweaking existing arrangements,” Moody’s explained in more detail.
“Reinsurers’ financial strength and reputation remain key considerations for cedants, with some citing concerns about reinsurers’ dependence on retrocession (retro),” they continued, also adding that demand for alternative capital solutions is expected to increase modestly as well.
The shift in pricing momentum comes on the realisation that returns haven’t been sufficient to absorb recent and future loss experience, for many in the market.
Pricing pressure is expected to be strongest in casualty reinsurance though, given the claims inflation being seen in some liability classes of business.
But reinsurance and ILS players should not expect broad price increases across the entire market, as localised increases will continue to be the case.
Moody’s said, “While cedants concede that moderate price increases are necessary, their expectation is that these will largely be constrained to loss- affected lines. A number of cedants expect that still ample supplies of capital will alleviate the need for more substantial increases.”
Some cedants are expecting to try to avoid too big an increase by tweaking terms or changing other factors related to their coverage.
“conceding on terms and conditions, or raising attachment points on excess-of-loss covers, while others expect the ceding commissions they receive from reinsurers to decline,” the rating agency said.
Continuing, “The growing sophistication of reinsurance buyers’ analytics has allowed for more targeted price negotiations, helping them confine price increases to loss affected lines and geographies.”
When selecting reinsurers, Moody’s said that reputation and claims paying ability are going to be key, which bodes well for the largest players in the reinsurance market.
However, this could also bode well for ILS funds and collateralized players that paid claims promptly in recent years, especially given the collateralized nature of the coverage means cash is guaranteed to be on-hand, reducing counterparty risks for ceding companies.
“Recent payment and collateral release disputes between cedants and alternative capital counterparties, although isolated, have underlined the importance to cedants of long- standing reinsurance relationships, and of reinsurers’ history of prompt claim payments,” according to Moody’s.
Finally, buyers are also increasingly focused on reinsurers retrocession arrangements and use of third-party capital Moody’s said, as the increased dependence on retro appears to make some cedants nervous.
“This has boosted their gross capacity, and provided a stream of fee income for those reinsurers that operate sidecars and ILS management platforms, but it has also made them increasingly reliant on supply and demand dynamics in the alternative capital market. This is a growing source of operational and execution risk,” Moody’s said.