Reinsurance rates expected to drop further at June & July renewals: Aon

Broker Aon Benfield has said that it expects that ceding companies will be able to capitalise on the strong levels of capacity and competition in the reinsurance market to secure further improvements in pricing, terms and conditions at the upcoming mid-year 2017 renewal season.

With the April reinsurance renewals just closed and seeing favourable terms achieved for many buyers once again, Aon Benfield looks ahead and believes further price declines are likely.

This goes a little against the market sentiment of increasing stability, and as we’ve been pointing out for a number of months now recent highly competitive catastrophe bond pricing suggests that traditional reinsurance markets are going to have to respond with further rate cuts in order to hold onto all of their market shares.

ILS markets have been described as “aggressive” at the recent April reinsurance renewal, which can be explained to a degree by some managers that have raised new capital and needed to deploy, as well as others having enlarged their portfolios over recent years making some of the lower priced deals still attractive as part of a diversified fund.

There’s also been an element of benefits extended to some repeat and mature ILS or cat bond sponsors, with many of the longest standing sponsors securing their best ever pricing multiples in the market with their latest transactions and resulting in some market share increase for ILS funds.

This speaks to an increasing comfort among ILS fund managers with the most experienced ILS sponsors, and the deepening of relationships with key re/insurer sponsors which is also resulting in ILS funds taking larger shares of traditional renewals on a collateralized basis.

So ILS market trends certainly continue to play into the rate trajectory and suggest declines ahead at the mid-year renewals, especially so as so many recent transactions have been pricing at levels so close to where they would have priced in the traditional market.

Another ILS sign that bodes well for the mid-years is the increasing prevalence of true all natural peril cover in the ILS market, with catastrophe bond sponsors increasingly seeking this out and the investor community increasingly ready to support it, especially for those sponsors they have built strong relationships with.

It’s certain that June and July renewals will see ample capacity available again, to meet ceding companies needs. Traditional capacity has continued to increase in volume and alternative capital has as well, bringing greater chances of further price declines.

Alternative capital has actually outpaced traditional reinsurance once again, resulting in it taking a larger share of the total market at the end of 2016. It’s safe to assume that the recent growth rate of ILS capital has continued as from the 1st January and the pace of issuance in the catastrophe bond market, as well as collateralized reinsurance participation in recent renewals, both suggest that ILS has likely increased in size over the start of 2017 and also increased its share of global reinsurance capital.

The upcoming mid-year reinsurance renewal in the U.S. could go two ways.

A continued steady decline in reinsurance pricing for many areas of the market and particularly property catastrophe lines, in the low-single digits, with ILS and alternative capital taking a slightly enlarged share of many key markets and achieving further growth, while traditional reinsurance capacity remains relatively stable. This would be a simple continuation of the conditions we see today and as a result perhaps the most likely outcome.

Or, a more concerted fight back on price in some key markets such as Florida and peak U.S. property catastrophe lines by the traditional market, which could result in steeper declines as reinsurers look to maintain their market shares. This scenario could see ILS players pulling back on deployment once again, as has been seen at other recent renewals where the traditional market was particularly aggressive.

Of course it could play out differently, but based on what we’ve seen and how the markets are talking about the upcoming mid-year renewals, one of these two scenarios does seem quite likely at this point in time.

Demand will of course be a factor, but at this time it doesn’t seem that any major increase is on the cards and in fact the shrinking of a program the size of Florida Citizens and uncertainty over whether the FHCF may pursue any increase in its reinsurance arrangements, demand could be relatively static.

In fact, Aon Benfield explained that the ‘assignment of benefit’ abuse and resulting increases in litigation that affect the Florida market could even contribute to “decreased demand for reinsurance at the mid-year renewals,” which would only ramp up competition for available premium.

Aon Benfield noted that strong capitalisation means reinsurance firms are well positioned to cope with any uncertainty that emerges between now and the renewals, suggesting it will take a really major event or loss to change current market conditions.

“Consequently, our outlook for the June and July 2017 renewals period remains positive, with ceding companies likely to achieve improvements in pricing, terms and conditions,” the broker said.

One final factor to look out for at the mid-year renewal is whether reinsurance firms will increase their use of third-party capital, growing their ILS sidecars and structures, or laying off more risk to alternative capital as it increasingly can’t meet their cost-of-capital requirements.

As reinsurers derive growing benefits from working with alternative capital, it could prove an increasing factor that actually drives more market share to ILS investors, while reinsurance firms look to get paid for their underwriting and management expertise.

The range of views from market sources and other broking reports is for a reinsurance renewal seeing pricing range from flat to slightly down, depending on the line of business, location and whether accounts are loss affected or not.

With demand factors uncertain, but capital and competition remaining high, it seems that the desire to maintain market share could be a big driver of the dynamics seen in June and July.

So how much rates may decline could largely depend on how keen to deploy capacity and keep market share the traditional reinsurance market is. It also depends on how long the underlying profitability of their books can be maintained by reinsurers.

With the market finely balanced right now, in terms of capital, competition and how that could impact pricing, the mid-year 2017 renewal could be a particularly interesting one to watch.

Follow all of our reinsurance renewal season coverage here.

Join Artemis in Singapore on July 13th 2017 for ILS Asia