Keefe, Bruyette & Woods (KBW) expects January 1 renewal rate increases to mostly disappoint bullish investors due to ample traditional and alternative capacity limiting rate increases in loss affected lines.
KBW places retro rate increases at 20 – 30%, but is less hopeful for affected reinsurers, saying “bigger rate increases will probably require either new catastrophic losses or higher estimates for past events” and forecasting “North American property – catastrophe rate increases of 10 -15%; global property – catastrophe rate increases of 0-5%; and property rate increases in the affected regions of 5 -15%.”
Very little spillover into unaffected lines or regions is expected.
KBW noted that with the exception of the recent trend of reinsurance panel consolidation that generally favours bigger reinsurers, correlations between year -over – year changes to the U.S. and foreign indices were actually lower between 2006 and 2017 than they were between 1991 and 2005 – demonstrating the increasing difficulty re/insurers have in turning a profit as market competition ramps up.
Legacy companies “will always be at a sustained disadvantage compared to new companies that can initially take advantage of higher rates without bearing the burdens of past inadequacies, Ascot Reinsurance’s planned 2018 start-up being the most recent example.”
“Having reinsurance prices respond (by definition, after the fact) to actual losses—rather than ahead of time to changing expected losses—creates an inferior industry model, in our view,” analysts said.
KWB expects the January 1 reinsurance rate increases to produce lower core loss ratios year over year, but said 2H18 share price performance is an unknown, and dependant materially on the presence or absence of major catastrophes.
