Retro re-pricing to drive higher reinsurance costs later in 2019: Credit Suisse

A re-pricing of retrocessional reinsurance capacity following the significant losses of the last two years is set to drive higher reinsurance costs over the course of 2019, as reinsurer seek to pass on higher retro prices to insurers, according to Credit Suisse.

Analysts from investment bank Credit Suisse held a conference call featuring Niklaus Hilti, head of Credit Suisse Asset Management’s Insurance Linked Strategies team yesterday.

The analysts report on the meeting states that the current low single digit reinsurance rate increases could rise to double-digits later in 2019, as the effects of a re-pricing in the retrocession market feed through.

Typically it takes as much as six months for a price spike in the retro market to feed through into higher reinsurance rates, the analysts say.

Currently, reinsurers are experiencing rate increases of as much as ~40% on their retro protection purchases, the analysts explained.

We’ve noted before that the price rises in retrocession have led some reinsurance firms to elect not to renew their entire retro program at the January renewal, as they wait to see how the market adjusts to the crunch in collateralised capacity and a lack of retro offerings.

This crunch and pull-back in retro has largely been witnessed on the collateralised side of the market, as a number of players took significant losses through 2017 and 2018 and now face a large amount of their capital being trapped, awaiting notification or payment of losses.

In addition this capacity crunch means the retro market is not fully reloaded and lacks capacity at this point in time, another driver for some buyers to wait it out and see how the market responds over the coming weeks before buying more retro in time for the U.S. wind season.

The analysts explain how this situation will likely impact reinsurance rates as the year progresses, given the typical time lag between a retro price spike and reinsurance rates increasing.

They explained that when the retro market re-prices, which they believe it to have done, reinsurers will have to pass on the increased costs, but that typically takes six months to filter through to primary reinsurance pricing.

As a result they expect to see broader reinsurance rate increases, perhaps by mid-year 2019.

Also set to influence reinsurance pricing throughout 2019 is an expectation that ILS market capacity will remain relatively static throughout the year ahead.

However, with numerous initiatives underway that could begin to bring new ILS capital to market and any increase in rates at mid-year also likely to attract some new capital inflows, the equilibrium between the amount of capacity available to pricing of reinsurance is set to be one to watch again in 2019.