Reinsurance rate increases are expected to accelerate at the all-important January 2020 contract renewals, as well as and perhaps even more so at April 1st, following the impacts of recent Japanese typhoons and hurricane Dorian this year, A.M. Best says.
The rating agency believes that these losses could be sufficient to instil greater urgency in reinsurance underwriting teams to push for higher rates, resulting in accelerating rate momentum and market hardening into 2020.
Reinsurance rates have been on the rise after subsequent years of elevated property catastrophe losses hit the market.
While 2019 has not seen a particularly significant overall sum of global catastrophe insured losses so far, the impacts of more another heavy loss year in Japan could tip market sentiment, A.M. Best believes, resulting in a greater desire to increase the returns from underwriting catastrophe exposed risks in this region and perhaps others.
Part of the issue here is the overall profitability of reinsurers, which A.M. Best has noted before are not exactly all bringing home significant returns for their shareholders from their underwriting.
In fact, in recent years the profits have often been delivered by reserve releases and investment returns, while the underwriting side of the business has not been delivering much in the way of a contribution except for in benign loss periods.
The realisation that this can’t continue seemed to kick in earlier this year and became increasingly evident at renewals as 2019 progressed, resulting in reinsurance rates recovering back to levels perhaps not seen for four or more years in some regions.
However, with profitability still barely evident it seems even a smaller overall global catastrophe loss burden could be enough to drive home greater desire for return and help to push rates at January 2020 renewals and beyond.
A.M. Best notes that while there is still a lot of uncertainty over the size of insurance and reinsurance market losses from recent catastrophes including hurricane Dorian in the United States and typhoons Faxai and Hagabis in Japan, their losses could be sufficient to “have a meaningful impact on the profitability of and pricing conditions for global reinsurers and retro players in the upcoming months.”
“Three consecutive years of severe losses, dwindling favorable reserve development out of prior accident years, and persistently low interest rates add up to a continued erosion of earnings,” the rating agency explains.
The erosion of profitability will provide sufficient impetus to help encourage further rate improvements at 1/1 2020 and April renewals, A.M. Best believes.
In addition, the near-miss that Florida had with hurricane Dorian will provide further impetus, as the rating agency notes that it “should have a psychological impact on the market.”
With loss estimates coming from reinsurers for typhoon Faxai already looking conservative, the same is likely to be the case for Hagibis, as reinsurance and retrocession providers look to ensure they don’t have a repeat experience of Jebi’s loss creep over the coming months.
A.M. Best explains that as Japanese primary insurers account for their losses more robustly at the end of their fiscal year in March, there are some months to go before the full picture will be understood, leaving a long time for the uncertainty to affect sentiment in the market.
A.M. Best reiterates what we discussed last week, that the typhoons of 2019 could result in a similar industry loss as 2018’s events, “leading to another lacklustre performance for the reinsurance industry in 2019.”
As a result, a third consecutive year of impactful catastrophe events and losses could “prolong the positive momentum that reinsurance pricing has experienced throughout 2019” so far, the rating agency suggests.
As a result, A.M. Best believes that reinsurance rates at the January renewals will now see an acceleration in increases, while this will be even more evident in April when the Japanese reinsurance renewals occur.
How localised renewal rate increases are remains to be seen, but A.M. Best seems to believe that the level of losses seen may be enough to drive broader firming.
Explaining, “Most players may finally acknowledge a fundamental change in the frequency of these events, prompting them to demand higher rates to mitigate potentially larger losses in the future.”
That sort of recognition that the market has perhaps underpriced some catastrophe reinsurance risks in a world where loss activity is increasingly frequent would be supported by many in the market at this time.
The prospect of more underwriting returns will be welcomed, both by traditional players and the alternative or insurance-linked securities (ILS) market.
How much rates can accelerate remains to be seen, but issues surrounding the trapping of collateral are certain to provide more stimulus to rate discussions from the ILS side of the market, while the lack of profits will drive more forceful negotiations from the traditional side it seems.
Whether three catastrophe (Dorian, Faxai, Hagibis) events totalling somewhere around $30 billion of sector-wide losses are enough to really make a difference, across the entire market, remains to be seen.
It could be that they just help to support rates in the broader reinsurance market, while accelerating more localised increases we’d suspect.
But either way, the impacts of another year of Japanese cat losses will definitely drive rates in that region in April, while the combined loss activity this year and overall concerns over frequency can only help to sustain other property catastrophe renewals pricing in January.
View all of our Artemis Live video interviews and subscribe to our podcast.
All of our Artemis Live insurance-linked securities (ILS), catastrophe bonds and reinsurance video content and video interviews can be accessed online.
Our Artemis Live podcast can be subscribed to using the typical podcast services providers, including Apple, Google, Spotify and more.