According to executives from Bermuda-based reinsurance companies and brokers that met virtually with analysts from KBW, the wave of new private equity backed start-ups are so far being seen to maintain the reinsurance industry’s price discipline as the key January renewals approach.
Discipline is a key factor in how successful the reinsurance market is in its demands for higher pricing at the renewals and start-ups can often be accused of lacking it.
New entrants to the reinsurance market, or insurance-linked securities (ILS), will often find themselves pushed to make concessions, or to simply make themselves cheaper, by brokers, if they want to get onto some of the better quality programs in the market.
That can have the effect of dampening rate increase speed and trajectory and is likely to be a factor in the renewals seeing a little lower increase in pricing than had been anticipated a few weeks ago.
But, despite the proliferation of new reinsurance start-ups and the demands on them to deploy their capital and to be cheaper, the executives in Bermuda that KBW’s analyst team spoke with said that they believe the start-ups are maintaining their discipline, so far.
“Positively, the executives we met noted that newly formed and newly capitalized (re)insurers (not all of which will have fully built out their operating infrastructures in time for the January 1 renewals) are maintaining the broader industry’s price discipline,” KBW’s analyst team wrote in a note last week.
It was even suggested that some of the capital providers might be a driver for discipline in certain cases, as one executive the KBW team met with said that “investors were far less likely to back executives looking to quickly grab share.”
While the start-ups are so far not being cited as a cause for the less firm than forecast rates the industry is expecting at the renewals on January 1st, there are factors in play that the Bermuda executives did cite as potential causes.
Among these are the record levels of activity in the catastrophe bond market, which the KBW analysts said was cited as one cause of rate deceleration, alongside capital inflows through traditional reinsurance company equity and debt raises.
Importantly, the analysts also note that while rate increases may not be as high as originally hoped for, the market is firming despite their being no lack of capacity.
“Unlike past hard markets that included material capacity shortfalls, there currently seems to be enough capacity for almost all risks, as long as the pricing is seen as adequate,” the analysts wrote.
That’s important, as it suggests a much broader level of discipline across the reinsurance market, including among start-ups, than has been seen for a good decade or more.
KBW’s summary is that the January 1st 2021 reinsurance renewals look set to be satisfactory, but not spectacular.
After the last decade of softening, the market will likely settle for that in the hope that this does drive a wedge under pricing from which it will not fall as quickly as before.