Morgan Stanley analysts expect pricing momentum to continue for reinsurers in 2020/21, with January 1 renewal price increases of 6-7%.
This would be the most significant increase since 2018 and analysts are becoming increasingly confident that the large incumbent reinsurers will see a benefit from the improving cycle, not just the
smaller, nimble players.
The reinsurers in Morgan Stanley’s coverage reported rate improvements in 1Q20, but positive
pricing dynamics accelerated in 2Q too.
In their 1Q trading statements, Munich Re, Swiss Re, Hannover Re and SCOR reported risk-adjusted pricing improvements of between 2% and 3%.
Statements from companies and market experts during conference calls hosted by the Morgan Stanley insurance team, along with media headlines, suggest that pricing trends accelerated again in 2Q.
Analysts says that headlines and market experts seem to agree on the attractiveness of the current market backdrop and anticipate rate momentum to continue throughout 2021.
MS believes that, unlike previous cycles, rate improvements are here to stay for longer. Ultimately much of the upswing observed in 2019 was driven by growing awareness among incumbents of certain issues such as climate change risk or model adequacy rather than the balance of demand and supply.
Furthermore, analysts see ROE as a key driver of pricing over the long term and show that a “capital event” isn’t required to boost pricing.
Ultimately, in the last 20 years, pricing up turns have been accompanied by capital inflows. For example, the industry saw capital inflows of $28 billion in 2002 in the wake of the 9/11 terror attacks, or an increase in capital of 25% year over year, while after hurricane Katrina, inflows into industry capital of $39 billion drove a 20% increase.
Moreover, analysts can identify only two years when the industry actually saw capital destruction, first in 2001 with the 9/11 terror attacks and again in 2008 as a result of the Global Financial Crisis.
Even in 2005, with hurricane Katrina alone costing the industry an estimated $76 billion, industry capital grew by 7%. This suggests a “capital event” isn’t required to boost pricing.
