Renewal rate increases seen in mid-teens at June 1st: KBW analysts

Rate increases at the all-important June 1st reinsurance renewals are expected to average in the mid-teens, with retrocession set to see even higher increases as capacity remains constrained in that marketplace, according to Keefe, Bruyette & Woods (KBW) analysts.

Having visited Bermuda this week to discuss the state of the reinsurance market as the key 6/1 Florida and other region renewals fast approach, the analysts found that increases are unlikely to reach previous hard market peaks, but that they will be significant when compared to the last decade.

KBW’s findings are roughly aligned with those of other analysts, such as JMP Securities, who said to expect 15% to as much as 20% increases in reinsurance rates for Florida after their recent visit to the Bermuda market.

With the increases seen though, KBW’s analysts warned that we should expect to see them “varying very significantly by cedant experience.”

This is encouraging though, as it shows that the market is not just applying a broad brush reinsurance price increase. Rather it is applying pricing based on performance of the cedant’s, which is a much healthier and more appropriate pricing situation that hard markets of the past when most ceding companies were subjected to relatively similar levels of increase.

It’s a sign of reinsurance markets increasing sophistication as well, plus the wide range of performance seen among insurers even when major catastrophes strike. As well as an indication that the market is increasingly aware of the greater choice of counterparties available, based on levels of discipline seen, in a reinsurance world where capital is more efficient and the processes for managing losses are improving.

KBW explained, “Year-over-year rate increases were very widely dispersed, with cedant-specific increases varying based on individual loss experience (including both overall ceded catastrophe losses and catastrophe reserve development), geographic exposure (reinsurers remain cautious about Miami- Dade exposure), and when cedants actually came to market.”

It’s still expected that the renewal will be later, as the strategy of coming to market late in the hopes of reinsurance firms and ILS funds capitulating and offering better terms is backfiring, KBW said.

In fact, numerous market sources they spoke with in Bermuda said that a number of Florida players are expected to fail to fill their reinsurance programmes by the 6/1 June 1st date.

While the mid-teen rate increases that KBW expects to see at the Florida reinsurance renewals are “well below prior peaks” they are still significant and will make a huge difference to the returns possible from portfolios of catastrophe reinsurance risk exposed to losses in the state.

Whether this pricing level can remain enforced, as a new floor perhaps, remains to be seen. But it is to be hoped that the lessons of the past year or two’s losses are not quickly forgotten, especially if 2019 were to remain relatively loss free.

On the retrocession side of the marketplace things remain more difficult, with capacity still constrained and key players not quoting this year, resulting in an expectation from KBW that retro rate increases will average 25% or so.

Again, that will be a significant boost to the return potential of portfolios of risk focused on this area of the market, both on the traditional and insurance-linked securities (ILS) fund sides.

Encouragingly for the retro market, KBW said that executives anticipate the firmer rate environment persisting through to next January, which may provide a significant opportunity for some players to take additional retrocession market-share over the June, July and January 2020 renewal seasons.

KBW said that key Florida players, such as Nephila, RenaissanceRe, AlphaCat and others, are sticking by their pricing line-in-the-sand, while at the same time new capacity is seen as limited for this renewals, as ILS players aren’t raising significant sums.

However, the market remain more than adequately capitalised to get the renewals done, which has likely stemmed price rises a little.

At the same time, KBW said that market’s, both traditional and ILS, are not pursuing significant market-share gains at this renewal, which will also help to ensure pricing hits its target levels.

With just days to go though, still there are programmes unfilled and quotes still outstanding, our sources said, raising the prospects of this being a particularly late June reinsurance renewal and suggesting there are still some pricing issues to sort out before everyone is covered.

Read all of our coverage of the reinsurance renewal seasons here.

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