The market could achieve “significant” reinsurance rate increases at the upcoming Japanese renewals in April and Florida renewals in June, as these two markets face some level of re-pricing on the back of catastrophes and market issues, according to S&P.
The Florida market in particular is “facing a dislocation, which could support double-digit rate increases” according to S&P Global Ratings, while in Japan the consecutive years of major typhoon losses are set to ensure that reinsurance renewal rate negotiations start from a higher bar.
S&P notes that the January 2020 reinsurance renewals were seen as satisfactory by many, with the market recording global average rate increases in the low to mid-single digits range, but with expectations for better in April for Japan and June for Florida.
Global property catastrophe reinsurance rates rose a little higher at around 5%, S&P estimates, but this has not been sufficient to allow any markets to recoup losses from the peak zones where the major catastrophe losses emanated.
Reinsurance capacity was not constrained in January, helped by a stabilisation of alternative capital from insurance-linked securities (ILS) players and continued demand for coverage in the form of catastrophe bonds, which filled some retrocession gaps as well.
Commenting on its view on reinsurance in aggregate, S&P explains, “We continue to characterize the overall reinsurance market as firming, with pricing dynamics varying by region, line of business, and cedant’s performance–some disappointed and others surprised in a good way.”
Reinsurance pricing is improving for a number of reasons, not least because the market still faces its challenges, at a time of heavy catastrophe losses and loss creep, while performance is questioned in some other lines and the industry is adjusting its view on risk (and pricing) in the wake of recent years.
“Overall reinsurance pricing is improving because views of risks are changing and risk appetites are adjusting while the sector still faces secular headwinds,” explained S&P Global Ratings credit analyst Taoufik Gharib.
“We expect the industry will carry some of this positive pricing momentum into the upcoming major renewals, notably in Japan in April and in Florida in June.”
With climate change and risk model credibility now serious areas of discussion, the industry is carrying forwards pricing momentum more readily as a result, leading to the expectations of stronger rates in April and June.
We’d add that July as well could be interesting, when more major U.S. regional and national programs renew, particularly those that took losses from wildfires in recent years.
Constrained retrocession is expected to continue playing a role in driving reinsurance rates, with “hard pricing” expected to persist for now at least.
On the more positive front for the ILS market, S&P has noted a stabilisation in capacity around the January renewals, with alternative capital seen as largely flat overall.
All of which leads S&P to remain stable on the reinsurance market and its reinsurers for now, given the sectors still robust capital adequacy, relatively disciplined underwriting and the overall improving reinsurance pricing environment.
S&P believes that any pull-back from investors in the ILS space is merely “a blip in a prolonged period of greater influx and influence from nontraditional third-party capital sources.”
The influence of alternative capital on reinsurance and retrocession “can’t be understated” the rating agency explains, and the fact it has stabilised in time for 1/1, despite further loss activity and trapping of collateral in the second-half of 2019, bodes well for a growth recovery and perhaps a growth spurt later this year.
Which makes things interesting or the April and June renewals, especially if reinsurance rates increase to the degree S&P suggests (significantly).
Two factors could dampen rate increases it seems, the tendency of the traditional market to over-compete to maintain market share and the tendency of some ILS strategies to raise significant new capital to seize opportunities, which can add to pressure on rates.
There could be a delicate balance between a highly successful series of reinsurance renewals in 2020, with decent rate increases for everyone, and a less welcome return of a weight of capital that leads to rate pressure.
As we always explain though, one underwriters adequate rate increase can be another’s disappointment, depending on their cost-of-capital, efficiency and return requirements.
With a myriad of these in the reinsurance market these days, both within the sides of alternative and traditional and across the spectrum, a renewal can be highly successful for one source and form of capital strategy, while being highly disappointing for another. So the picture is never as clear-cut as rate pronouncements after renewals suggest.
S&P expects that alternative capital growth will resume in time, once the current bumps are smoothed over.
Overall, S&P says, “We view the reinsurance market as a hardening market rather than a firm one. However, the overall sentiment is positive, with a consensus view on continuation of pricing momentum through 2020.”
“There is more to come through the course of this year.”
As a result, the rating agency is expecting “significant” reinsurance rate improvements at the renewals through 2020.
In Japan at the April renewal, the rate conversations are expected to begin from a higher level than a year earlier, leaving more room for the increases secured to be higher.
“Reinsurers will likely push for more rates up front than spread out over a multiyear period,” S&P explains.
In Florida meanwhile, at the June renewals, S&P warns of a market “facing a dislocation” saying that the situation in the Florida market could mean that at reinsurance renewals “double-digit rate increases” may be possible.
“Florida is a peak zone exposure for many reinsurers and a large market for alternative capital. In view of multiyear pain and a shift in views of risk, both traditional and alternative capital have higher return targets,” the rating agency said.
In retrocession the pain and lack of capital is likely to persist for a time, while at the same time demand may also rise.
S&P says, “As the midyear renewals go through, there’s a good possibility reinsurers will be back with higher demand to cover some of their exposures and might seek some relief via the catastrophe bond market. In any case, retrocession capacity will remain dearer.”
However, S&P cautions that, “The level of rates that can be achieved will depend on the balance (or rather, the imbalance) of supply-demand. Heightened competitive pressures and restart of growth in alternative capital could somewhat cap the rate increases.”
As ever capital levels, risk appetite and discipline will be key for the outcome of the renewals this year, perhaps more so than ever in current market conditions.