Analysts at Berenberg believe that 2018 has revealed that the reinsurance industry can no longer expect significant price hikes following large loss events, warning of a new normal underlined by an abundance of capacity from both traditional and alternative sources, that’s ultimately hindering profitability.
Historically, the occurrence of large loss events had resulted in significant price hikes across the board for reinsurers, enabling companies to make up for reduced profits in normal catastrophe loss years.
However, the persistent and expanding inflow of alternative reinsurance capital into the global reinsurance market has altered the dynamics of the space, something underlined by analysts at Berenberg recently, who discussed a ‘new normal’ for the industry.
“In our view, 2018 has demonstrated that the industry can no longer expect significant pricing tailwinds following large loss events to make up for poor performance in normal catastrophe years. Despite the 2017 losses, the industry remains significantly over-capitalised and insurance-linked securities (ILS) have responded rationally to these losses. This indicates that these instruments are likely to remain part of the industry.
“With such capacity in the market, it is difficult to envisage substantial price rises even following poor catastrophe years. As such, we assume minimal pricing tailwinds in our models,” said analysts, in Berenberg’s June 2018 Insurance and Reinsurance report, ‘A new normal’.
The message from analysts echoes that of other industry commentators, experts and observers in recent months, both pre and post 2017 cat events, that the abundant supply of capacity would likely result in a flatter market cycle underlined by muted pricing highs and lows, regardless of loss activity.
Berenberg analysts said that they “anticipate the pricing cycle to be less pronounced going forwards”, driven by an oversupply of available capacity and “continued improvements in the modelling” of large events, “which has resulted in less claims and reserving uncertainty.”
“Overall, this combination of greater levels of capital and improved loss modelling has capped the ability of reinsurance providers to drive material price increases over this period,” said analysts.
Interestingly, analysts also claim that the fact price responses post-event appear to be heavily focused to loss-impacted lines of business, is another driver of shallow price increases following 2017 cat events.
“Cedants who have not suffered losses are rightfully unwilling to pay more for their coverages in order to cover losses on other accounts. We expect that this will continue to be the playbook, with limited potential for a material hardening in the market in the near term,” warned analysts.
Looking forward, Berenberg analysts expect challenges to persist for reinsurers, warning that increases across the board are likely going to be insufficient for some players to meet their cost of capital needs.
“Hence, we expect the challenges facing the industry to continue and do not believe that the price rises will bail out the underperforming players in the industry,” said analysts.
