Reinsurance rate momentum slowing, but main trends intact: Berenberg

While momentum in reinsurance pricing has been seen to slow, analysts at Berenberg are the latest to say that they believe the main trends driving recent firming remain intact and should push pricing higher at the key mid-year renewals.

The reinsurance market hardening continued at the April 1st renewals, but this was seen to be at a slower pace, according to the equity analyst team from investment bank Berenberg.

The rate of firming momentum has been seen to slow, year-on-year, in Japan, which the analysts believe indicates a general slowing of price increases at this time.

However the market remains bifurcated, with loss impacted and threatened, particularly peak catastrophe exposed, reinsurance programs still seeing more significant rate increases.

The analysts feel that a slowing of momentum should not be views as disappointing yet and they disagree that April’s renewals were disappointing, saying that as the third-year in succession of firming in Japan the overall profitability of that reinsurance business is now much higher.

The upshot should be better profitability, losses allowing, especially when so many of the major reinsurers have also been growing into Asian risks at recent renewals.

“Undoubtedly, rate increases are slowing down, but, to date, we note that rates are still hardening across all classes and geographies, which should benefit the bottom line,” the Berenberg analysts wrote.

They expect large reinsurers, like the big four European firms, will improve their combined ratios by at least 1% over 2021 and more in 2020

The main headwinds that have been driving reinsurance rates persist though, which should ensure further firming at the mid-year renewals and potentially into 2022 as well.

“These conditions include: the industry wide change in risk perception; the ongoing uncertainty from the pandemic; low interest rates; the higher frequency of natural catastrophe losses and the ongoing trend for elevated levels of secondary perils; and the risk of social inflation continuing to elevate casualty claims. These issues will continue to dominate discussions for the remainder of this year at the very least, in our view,” Berenberg’s analysts explained.

The one factor that we believe could slow firming faster over the rest of this year could be capital and appetite for risk in the catastrophe bond space.

At this time catastrophe bonds are completing at particularly attractive price points for their sponsors, making capital markets backed reinsurance protection more attractive and cost-effective to secure.

If this trend continues and multiples of new cat bonds issued continue to be depressed, there is a chance we begin to see a little more pressure on pricing from the traditional and collateralized reinsurance sides, as they seek to match the keen pricing on offer in the cat bond market.

While inflows to ILS and cat bond funds have not been overly significant so far, given the level of maturing bonds is close to those issued, it seems investors are willing to reinvest this at price levels that are not as high as we were seeing in the second-half of 2020, suggesting that the cat bond market has softened somewhat over the last six months (as reported it could), which could spread to broader reinsurance markets if it becomes viewed as competition.