According to sources in both the insurance-linked securities (ILS) and traditional reinsurance markets, some of the European property catastrophe reinsurance programs coming up for renewal at 1st January 2016 are aggressively priced, with indications at levels below expected loss.
This trend was witnessed at other recent reinsurance renewals, with European property catastrophe risks being called the most aggressively priced in the marketplace, resulting in some risks with very thin margins beginning to look almost unprofitable.
The reasons for this are many, but the fact that risks are being priced at levels near, or even below, the modelled expected loss raises the spectre of those underwriting such risks taking on significantly more exposure at ever dwindling margins or return.
Price declines have been widely expected for the January 2016 reinsurance renewals, with analysts and observers expecting anything from flat for some specific loss affected lines, to as much as -10% or even greater declines on the most competitive sectors of the market.
European reinsurance signings have witnessed significant competition at recent renewals, as they provide a key diversification opportunity for both the large, traditional reinsurance firms as well as for the smaller and newer breed ILS fund managers.
In fact, it has been reported previously that some traditional reinsurers have aggressively priced European risks in order to maintain levels of diversification, which enables them to keep writing the better priced exposures in the U.S. market.
The use of regional property catastrophe reinsurance exposure as a diversifier, almost akin to life insurers use of mortality and longevity risk as a natural hedge, means that some of the largest players can continue to write these risks even though the margins shrink.
The low pricing of capacity for European reinsurance programs has also led to a decline in the use of catastrophe bonds for some catastrophe risks such as European windstorm, as traditional or fully collateralised reinsurance options have been so competitively priced.
But now, with some of our contacts reporting that initial pricing indications for European risks at the January 2016 renewals have been slashed even further, the concern over levels of risk being assumed once again come to the fore.
Throughout 2015 there has been commentary, which Artemis has reported on, that the pricing for some reinsurance contracts have been approaching the level of expected loss. At or below that level it suggests that risks are perhaps being underpriced and that returns have declined so far that these renewals must be being used purely as diversifiers, or by those who just need to get their capacity deployed.
The need to deploy capacity applies to both traditional reinsurers and to ILS players. Some sources have suggested that a number of ILS managers may elect to return capital rather than underwrite some of these very low-priced European risks, if alternative avenues for deployment cannot be found.
Sources also told us that a number of programs have had to be repriced during the last week or so of December, as the initial feedback from reinsurers and ILS markets suggested that they wouldn’t get written at all otherwise.
Another market rumour that has been doing the rounds in the run up to the January 2016 reinsurance renewal, is that some programs have been priced and marketed using data from the third-party risk model that provides the lowest expected loss, enabling the pricing to be offered at very low levels.
Of course most reinsurance markets, whether traditional or ILS, will have the ability to run their own models to establish a view of risk and determine whether the proposed pricing is adequate. But for any who can’t, or choose not to, the risk of assuming more risk than they are being compensated for is again apparent this renewal season.
With margins looking to become increasingly compressed, as reinsurance program pricing moves ever closer to expected loss, the risks of suffering outsized losses increase and, combined with the expansion in terms and conditions, the threat to some smaller, more marginalised players could grow.
It looks like discipline will again be the watchword for the January reinsurance renewals in 2016 (as well as “risk adequate” pricing). Those who fail to adhere to it could find themselves in trouble, as soon as global catastrophe losses bounce back to more normal, or above normal, levels.