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Capitalisation to remain strong, reinsurers to be more cautious: KBRA

27th February 2020 - Author: Luke Gallin

Traditional reinsurance companies are expected to report strong levels of capital at year-end 2019 and while capitalisation is likely to remain adequate throughout 2020, reinsurers are expected to become more cautious, according to Kroll Bond Rating Agency (KBRA).

rate increasesThe recovery in the capital markets through the first nine months of 2019 from a low in December of the previous year, helped traditional reinsurance capital expand 9% during the 9M period.

This expansion, combined with a continued overall favourable investment landscape, lower catastrophe losses, continued favourable prior year reserve development, and also a small rise in demand for protection through 2019, is likely to see firms report solid capital levels at year-end 2019, says KBRA.

Through 2020, analysts at KBRA do expect that reinsurance capital levels will remain adequate, but warn that when it comes to deploying it as the year progresses, firms will most likely be more circumspect. KBRA states that this is likely to be in response to elevated retrocessional costs, lower interest rates and growing uncertainty around reserving.

While capital remained adequate at the January 1st, 2020 renewals, analysts note that pricing again was a disappointment as the marketplace remains fragmented.

“Elevated capacity, trapped capital, and increased risk appetite on the part of large traditional players dampened price increases. However, there have been some withdrawals of reinsurers from long-tail business,” explains KBRA.

On a more positive note, reinsurers did see some modest pricing improvement in U.S. property catastrophe pricing, relative to non-catastrophe property and casualty business. Rate hardening was evident in loss-prone Japanese property cat lines, while rates in other Asian markets remained flat. KBRA notes that reinsurance rates for European property rates moved sideways.

In light of dynamics in the retrocessional market, loss creep and the catastrophe experience of the U.S. and Japan in recent times, it’s expected that a more meaningful rate response will occur at the important April and June renewals.

However, adverse development on prior year loss events started to take its toll in 2019 and despite overall prior-year development remaining favourable for the first nine months of the year, it did decline dramatically as a result of typhoon Jebi in Japan, and also the late reporting of loss estimates, and deteriorating loss cost trends in U.S. casualty.

“Uncertainty over potential loss creep from Typhoon Hagibis casts a shadow over reserve development in the intermediate term,” says KBRA.

Industry commentary has highlighted significant reserve deterioration for reinsurers, with some warning that 2020 could see an inflection point. Reinsurers have, and some more than others, leveraged reserves to offset poor underwriting returns in what remains a challenging market, so the fact deterioration appears to be impacting more and more companies suggests that firms will be less able to call on their reserves in the future to bolster profits.

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