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Xactanalysis Insights and PCS

Reinsurers to use up Q4 cat budgets, won’t change pricing: Deutsche Bank


The big European reinsurance firms are expected to use up or even exceed their fourth-quarter 2016 major natural catastrophe loss budgets, according to analysts at Deutsche Bank, but even a higher loss toll at the end of the year will not be sufficient to put upwards pressure on pricing.

While Q4 2016 natural catastrophe loss budgets at major reinsurers are expected to be used or exceeded, the analysts remind us that this is still only a normal quarter of loss experience and that 2016 overall has not seen an elevated major loss load.

Hurricane Matthew and the Kaikoura, New Zealand earthquake are the two major events of the quarter, but Deutsche Bank’s analysts also said that the Tennessee wildfires could raise the quarterly toll.

As we wrote last week, the Tennessee wildfire’s have already received a loss estimate of $842 million from the regional insurance department, so impact on the major reinsurance firms is likely assured at that level of loss.

For the big four European reinsurance firms Deutsche Bank expects most to use up their fourth-quarter catastrophe loss budgets and some to exceed them.

Swiss Re, Munich Re, Hannover Re and SCOR are all expected to largely use up their catastrophe budgets for the quarter, with some possibly going over budget.

While there is an expectation that price declines will continue to slow down in reinsurance, the fact these major reinsurers are expected to hit their catastrophe budgets will not have any influence on this, with capital and capacity continuing to build.

In reality, these are expected catastrophe loss loads and it would take a quarter, or multiple quarters, where these largest reinsurers all blow significantly through loss budgets for any pressure to build up that could result in price stabilisation or even rises.

These reinsurers, particularly Swiss Re and Munich Re, are expected to try to offset the declining reinsurance prices, in even more tailored, large single transactions and direct corporate insurance provision.

The analysts expect that the major reinsurers will report price declines of about half of the 2016 renewals, as the deceleration of price declines continues.

“With these movements, we believe that the pricing cycle should be getting closer to the bottom,” the analysts explain, but noting that, “On the other hand, we see no upside catalyst as long as no bigger event takes significant capacity out of the market.”

While catastrophe losses may exceed budgets, these are not the type of losses that could take the pressure off the market and while alternative capital continues to grow and find new ways to access more risk, it will take a significant event or series of major losses to move the market.

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