A number of trends noticed during the recent June 1st reinsurance renewal point to the proximity of a pricing floor for U.S. property catastrophe reinsurance, and these trends are expected to be seen more widely through the U.S. nationwide accounts renewing in July.
The much discussed pricing floor has been anticipated for some time in U.S. property catastrophe reinsurance, with signs at the January renewal suggesting that underwriters, both on the traditional and alternative or ILS side of the market, are increasingly feeling that rates are no longer always compensating them for assuming risk.
At the June reinsurance renewal, one of the market’s key junctures as it features a significant proportion of the Florida property catastrophe market renewing, the accepted opinion on rates is that they were typically down up to -5% from the previous year, but that some accounts traded roughly flat.
However there are a number of trends that have been playing out which all point towards the elusive pricing floor nearing, particularly on some U.S. property catastrophe accounts.
As has been seen occurring at a number of recent reinsurance renewal seasons, terms have in many cases been agreed in advance as ceding companies look to get to market early to avoid the congestion that can happen as the renewal date appears.
This is good for the market, in many ways, as it can mean longer negotiation time is available, and that underwriting decisions are made under less stress, than right before the renewal date. Whether it results in more favourable terms for the ceding companies or the reinsurance or ILS markets is less clear.
We’re told by a selection of reinsurance and ILS markets and brokers that we’ve spoken with that of the U.S. renewals that signed at 1st June and those that have already agreed terms for 1st July a significant number of accounts have or are set to renew flat in 2016.
That’s particularly encouraging for the insurance-linked securities (ILS) market and ILS fund managers, many of which pick up the majority of their annual returns from the U.S. renewal cycle still, given the rates are still higher for U.S. perils, despite that market now seemingly being so close to a floor.
Conversely, the international property catastrophe reinsurance market continues to see pricing pressure, we’re told, with the few accounts renewing at mid-year looking likely to price down around -5% to -10%, according to the discussions we’ve had.
As ever, this 2016 mid-year reinsurance renewal season also sees a number of accounts which are being avoided by ILS managers, as the price indications point to a greater than -10% fall in rate which for the majority of the ILS market pushes the returns below acceptable levels, we understand.
As well as some accounts seeing ILS markets walking away, as pricing levels drop below minimum expected returns, others have been re-priced in advance of the renewals in order to gain sufficient signings to be completed, we are told.
We continue to hear reports from markets that there are accounts being offered, or renewing, at pricing levels that are below the expected loss of all of the risk models. Clearly this seems crazy, to underwrite at what could be a negative return, but with large, global players wielding diversity as a weapon at renewal time, this practice appears to be continuing in some pockets.
For placements to be completed most ceding companies want a diverse panel of reinsurance markets, but in some cases in 2016 we’re told that panels are being squeezed down with large traditional reinsurers sometimes taking the lions share of the renewal.
ILS markets suggest that this has been particularly seen in a number of large retrocession renewals, particularly the transactions with lower expected losses where returns are becoming minimal.
This pulling back of capacity, refusal to sign at any price, re-pricing of certain accounts and shrinking of panels as willing participants become fewer, is all signs of a pricing floor coming into play on certain U.S. property catastrophe accounts.
As ever, and very similar to what we’ve seen in the catastrophe bond market, it is the more remote risk layers that are renewing flat at the moment, while some of the higher risk layers continue to see price declines.
But the general opinion seems to be that the price declines are getting much less steep and that the range of accounts renewing flat is broadening, suggesting that the floor is definitely becoming more proximate and that as it does so, the experience of the market suggests greater pricing stability.
Of course pricing stability and a floor is only really going to stop the declines being as steep, while the reinsurance market remains awash with excess capital and the ILS or capital markets continue to eat away at it.
Without a major capital draining loss event, the likelihood is that we would see further small declines at future renewals, but perhaps with the renewing flat portion of the market growing year after year.
That won’t help reinsurers returns on equity (RoE), which look destined to continue a steady decline while the market remains soft. At the same time profitability will also continue to slide, pushing companies to deploy capital into other areas of the market, longer-tailed risks, or to enter the primary insurance market.
So with the pricing floor, at least on some U.S. reinsurance lines, becoming more proximate it doesn’t necessarily signal any change in the pressure being felt by market participants, that looks set to continue.
However it should at least signal that the only way is up, once some kind of major loss, adverse reserve development issue, financial crisis, or worsening of investment conditions, occurs.
As ever, the question remains how long the market can continue to operate at minimal returns?
Which as our readers would expect, raises the usual subject of the winners needing the most efficient capital, the facilities and processes to get it closest to the source of the risk and all while operating with the lowest expense ratio in deploying capacity.
Disruption looks set to continue…