Fitch Ratings believes the expansion of alternative, or third-party capital has changed the dynamics of the reinsurance market, resulting in modest rate increases at the recent January 1st renewals and driving a potentially flatter underwriting cycle.
The extremely active 2017 Atlantic hurricane season combined with powerful earthquakes in Mexico and devastating wildfires in California, resulting in one of the costliest catastrophe loss years on record for global insurers and reinsurers.
After years of falling rates and increased competition from both traditional and alternative sources of reinsurance capital, many in the space were hoping for significant rate increases at the January 1st 2018 renewals season.
However, many reinsurers were disappointed with the level of price hikes witnessed during renewals, and Fitch feels that the growth of alternative capital has potentially led to a flatter underwriting cycle, where the peaks and troughs of today’s marketplace are less pronounced than in previous cycles.
Fitch explains that as it predicted in the fourth-quarter of last year, property catastrophe reinsurance rates increased at 1/1, but despite the large level of losses, rate increases were modest.
“We believe the growth of the alternative capital sector has altered reinsurance market dynamics, making capacity shortages less likely and the underwriting cycle potentially flatter. Insurance-linked security investors have already largely replenished most of the capital consumed by last year’s catastrophe losses,” said Fitch.
The potential for a flatter underwriting cycle has been discussed in the past, and particularly since the alternative capital space really started to expand and claim a larger slice of the overall reinsurance market pie. At the same time, some industry analysts, experts and observers did note towards the end of last year that in spite of the high level of losses, the excess capacity in the space suggested a flatter cycle a the January renewals, with the presence alternative capital limiting any price hikes.
“January’s renewals show double-digit rate increases on some US loss-affected reinsurance programmes but increases elsewhere were modest. In Europe, 2017 was a benign year for catastrophes so, despite US losses, reinsurers were unable to reverse much of the rate reduction from recent years,” said Fitch.
Looking forward, Fitch maintains its negative outlook for the reinsurance sector, as it continues to see pressure on earnings from alternative capital, low investment returns, and competitive pricing.
