With reinsurance pricing firming broadly and expected to continue to do so, one of the dynamics we expect to see in the marketplace is increasing competition, as the improved rate environment attracts some underwriters back to the market.
Case in point W. R. Berkley, whose appetite for reinsurance underwriting has diminished over the last decade as prices softened and whose executives have bemoaned the role of alternative capital in pressuring rates.
Now though, with reinsurance firming broadly across property and casualty lines, with this firming expected to continue and help reinsurance catch-up with where primary and retrocession rate increases have got to, we can expect to see underwriters like W. R. Berkley coming back with replenished appetites.
After reporting its quarterly results yesterday (which you can read more about over at our sister site Reinsurance News), W. R. Berkley’s senior leadership held its earnings call with analysts and investors, in which they explained how the firming of reinsurance rates was likely to adjust their appetite for underwriting.
During the call, W. Robert Berkley, President and Chief Executive Officer, of the company, explained that, “If one thinks back to last year, there was a growing groundswell of a firming market. You could probably see it before 2019 but during 19 it very much came into focus. We saw it accelerate throughout the year and we saw it continue to accelerate into 2020, it was very evident in Q1.
“The evidence of this was demonstrated, at least in part, by business leaving the standard market and making its way to the specialty market, in particular the E&S market. We saw rate increases that we as an industry have not seen in some number of years and we could see a reduction in capacity that various carriers were offering.
“All of these things were being driven, in our opinion, by two major factors. One being the low interest rate environment and the knock-on effect of what that means for investment income, and number two, loss cost trends, to a great extent driven by social inflation which has been benign for an extended period of time and then, in our opinion, crept up on the industry when it was least expecting it. It has proven to be much more of an issue.”
Berkley went on to say that the drivers that have stimulated the firming market are “alive and well” adding that interest rates are now even lower, so that driver has if anything increased at this time.
He also said that the industry’s awareness of loss cost trends and social inflation has likely increased as well.
He explained that property rates are firming, as too are the general liability rates W. R. Berkley is known to underwrite, while even workers’ compensation is showing signs of bottoming out.
But on reinsurance, Berkley is particularly pleased with the price environment at this time.
He explained, “The reinsurance market clearly has been waiting, give or take, I don’t know, call it a decade-and-a-half for the moment that is upon us. Things are firming.”
Adding, “We’ll have to see how much discipline really returns to that market. But, as we see that discipline return, you will see us grow our reinsurance division more and more, and certainly it may have an impact on how much business we choose to cede to that marketplace.”
So there you go. If companies that have been waiting out the reinsurance softening for more than a decade now think rates are returning to a level that meets their underwriting appetite, this likely will result in more competition and ultimately more capacity targeting reinsurance limits.
How that affects the firming potential of the market remains to be seen.
The other side of this dynamic is the fact that as reinsurance firms, some companies may choose to cede less risk to it, as Berkley said. So demand could be slightly reduced as well.
If there’s more capital targeting reinsurance, but perhaps a little less demand from those finding rates higher, it will be interesting to see where the pricing levels off.
Of course, with rates also increasing in primary lines, any changes in demand may be more evident in terms of where protection is bought, rather than the amount and this could also play into the hands of the catastrophe bond market, if issuance and pricing there can remain efficiently priced.
W. R. Berkley likely won’t be the last to adjust its appetite in the current market environment.