The insurance and reinsurance industry loss from the Tianjin port chemical storage facility explosions in China could help to moderate price declines at the all-important January reinsurance renewal season, according to J.P. Morgan Cazenove analysts.
The analysts suggest that as a result of the exposure faced by some of the world’s largest reinsurance firms the market may find it can hold up pricing at the 1/1 renewals better than had been expected.
This is particularly interesting, as just this week in Baden-Baden reinsurance broker Guy Carpenter said that it believes that reinsurance pricing could decline by double-digits, higher than had been anticipated just a few weeks ago at the Monte Carlo Rendez-vous.
The J.P. Morgan Cazenove analysts may be operating on the assumptions that they left Monte Carlo with, saying that; “We believe that Tianjin may help moderate price falls at Jan 16 to a range of -2% to -4% vs before -3% to -5%.”
All observers had been expecting reinsurance prices to moderate in January, with single digit declines expected, until Guy Carpenter’s comments this weekend increased the uncertainty over how steep the declines may be.
But the analysts comments that Tianjin losses could help to moderate price declines are encouraging, as they suggest that reinsurance price discipline will remain intact.
The latest estimates for the insurance and reinsurance industry loss from the Tianjin explosions have been put at around the $2.5 billion to $3 billion mark, with the potential for losses to be higher if contamination or pollution became a factor.
The Tianjin blasts are expected to leave reinsurance firms reporting higher combined ratios for the third-quarter over the results season which is just about to begin.
The analysts have assumed a loss of around $3 billion for Tianjin, which they say combined with the Chile earthquake losses, California wildfires and any exposure to the Volkswagen directors & officers policy, will likely result in third-quarter 2015 being less profitable for reinsurers than the prior year.
The analysts note that there is still significant uncertainty in the final loss total from Tianjin and how that might affect the biggest reinsurance firms. They expect most reinsurers to report their maximum limits as losses at Q3, which could then be followed by reserve releases as the true extent of losses emerges.
For the biggest reinsurers the J.P. Morgan analysts have estimated losses of around $260m for Munich Re and $300m for Swiss Re, with SCOR at $45m and Hannover Re at $130m.
Just this week as well XL Group has announced a preliminary estimate of $100m for its exposure to Tianjin, with 30% from its insurance business and 70% from the reinsurance arm. XL notes that the loss is subject to revision as clearer information on the complex event emerges.
So the losses are certainly mounting and may help to apply the brakes slightly to reinsurers willingness to support price declines at the January renewals, but with others suggesting that price competition will remain fierce, at the moment it looks like a mixed renewal could be ahead.
Some reinsurers may try to hold up pricing and Tianjin could certainly affect reinsurance rates for the regional exposures where the event occurred, but would this loss be enough to moderate the whole reinsurance sectors willingness to relax pricing, terms and conditions? We’ll have to wait and see.
“The impact of Tianjin on pricing for China property reinsurance is likely to be moderately positive,” the analysts explain. However they add that it may not mean price rises, as; “We believe that reinsurers will take the view that a modest price adjustment, plus the prospect of strong future growth, is sufficient to cover the loss.”
The analysts from J.P. Morgan note that reinsurers typically expect a catastrophe loss and man-made disaster load of around $24 billion in the third-quarter of the year, but that in 2015 the total is likely to be significantly below that.
With levels of reinsurance capital still building up, as surplus builds, losses remain low and ILS players continue to look for opportunities to raise more capital, the pressure on pricing looks set to continue. For Tianjin to really have a moderating effect the final loss would have to move significantly higher than the levels expected today, we think.