Reinsurance rate softening not being passed on to primary customers, yet

The drop in property catastrophe reinsurance pricing, which has affected reinsurance renewals in June and July with reinsurance rate reductions showing no sign of slowing, has not yet translated into reductions in primary insurance pricing, according to comments made by the CEO of independent insurance broker Brown & Brown.

According to comments made during the brokers second-quarter earnings conference call yesterday, it sees continued upwards momentum in P&C insurance, and many other lines of primary insurance business, but it acknowledged the growing pressure that the ‘reinsurance issue’, as the CFO termed it, is having on primary rates.

J. Powell Brown, CEO of Brown & Brown, said that the broker is not yet seeing primary carriers passing on reinsurance rate decreases to their clients. It’s clear that the ‘reinsurance issue’ is receiving a lot of attention on the primary side and it’s likely that primary carriers are hoping to hold rates for as long as they can, but Brown cited ‘competitive pressures’ that have moderated primary insurance rate rises more in Q2 than they did in Q1.

Cory Walker, CFO of Brown & Brown, explained that primary carriers are reluctant to pass on reinsurance rate decreases partly because they cannot pass on rate increases immediately without surprising their clients. So, with a sudden drop in reinsurance pricing as we’ve seen this year due to the increasingly competitive nature of alternative reinsurance capacity backed by the influx of third-party capital it will take time for primary carriers to pass that on.

Walker said that the rate market is moderating and that this will continue as primary carriers benefit from reinsurance rate decreases. If the hurricane season is not impactful to the U.S., particularly Florida, again this year then primary rates may decrease across the excess and surplus (E&S) market, he said. So it would seem that there is an element of lag in the passing on of reinsurance price decreases while the primary underwriters wait to see if the 2013 catastrophe loss year is kind to them.

The issue of insurer and reinsurer surplus is another factor moderating primary rates and this has created a very competitive environment. Walker said; “It’s not just the reinsurance issue that’s going to moderate rates further.”

So currently the impact of the capital markets on the reinsurance sector is having a moderating effect on some primary lines of business but the full savings that primary carriers are making on their reinsurance program renewals are not yet being passed on to clients.

It will be interesting to see how primary rates adjust if the January reinsurance renewals experience similar downward pressure due to further growth of the capital markets convergence space, as most commentators are forecasting. At what point do primary insurer clients begin to bemoan the fact that they see their carriers making larger profits due to cheaper reinsurance while holding primary rates up?