January 1 reinsurance renewal rates are expected to decline -5% to -15%, while terms and conditions are expected to expand further, as alternative reinsurance capital drives secular change across property catastrophe risks and into longer-tailed lines, say analysts.
The analysis from Morgan Stanley & Co. LLC, led by Kai Pan, is the results of the insurance and reinsurance focused equity analysts latest trip to Bermuda, where they meet with traditional reinsurers and alternative market players.
The outlook has, unsurprisingly, not changed. Further pressure on property catastrophe reinsurance pricing is predicted for the upcoming January reinsurance renewals. However this pricing pressure is expected to come with additional loosening of terms and conditions, which once again suggests that more risk will be assumed by reinsurers for lower margins.
The pricing pressure is expected to continue to spread wider in the reinsurance market as well. Morgan Stanley’s analysts say to expect softening across some longer tailed lines of business, as excess capital chases rate into casualty and other lines.
The upshot is that the analysts say to expect declines of -5% to -15% across the reinsurance market, as the continued abundance of traditional reinsurance capital and the continued growth of alternative capital apply increasing pressure on reinsurance rates. Pricing pressure is expected to be at a slower rate than seen over the last year, however the fact that demand remains sluggish will ensure that downward momentum continues.
The analysts note that catastrophe risk modelling may provide some pricing floors, but the imbalance of capacity supply and demand will continue to pressure rates in the future, in the absence of very large catastrophe losses. Morgan Stanley says $50 billion plus, but the longer the market goes without a major loss the higher that number is going to need to be.
The analysts note that casualty insurance and reinsurance pricing does remain more stable, but that it is coming under an increasing amount of pressure as excess traditional capital hunts for rate and as alternative capital increasingly looks to enter these markets.
Alternative, or third-party, reinsurance capital has grown rapidly, the analysts note, now accounting for 15% to 20% of global reinsurance capacity, or $60 billion of approximately $240 billion, by their estimates. In terms of growth, they believe that this capital has grown by a CAGR of around 26% over the last five years and has increased by around 225% in the same time period.
While this capital has the largest effect on property catastrophe reinsurance, it is increasingly being put to work in other areas of the reinsurance market, affecting rates and market equilibrium more broadly now.
The Morgan Stanley analysts believe that this is a secular change that could disrupt the traditional reinsurance balance-sheet business model, with the goal of matching risk to the most efficient capital. We would agree, but perhaps go further to suggest that it already has disrupted the traditional reinsurer model and that this disruption is set to continue.
As a result of this disruption, the analysts say that consolidation should accelerate, but achieving that in the current market is easier said than done. Larger reinsurers are increasingly favoured by insurers, as they seek to consolidate their reinsurance panels. However while consolidation might make sense for smaller players, the cultural and financial barriers remain.
So the overall assessment hasn’t changed, rather the downsides persist and if anything are beginning to get worse for some. It will be interesting to see how analysts assess the reinsurance market post-renewals once they have had a chance to see the outcome and assess the full-year 2014 results season.