Following meetings with insurers, reinsurers and brokers JMP Securities analysts are anticipating significant positive pricing change in Japan’s upcoming April 1 renewals, roughly twice the magnitude seen in 2019.
JMP notes that, while pricing changes will vary substantially by both layer of a program and by individual cedant, a surprising amount of consensus was seen regarding overall XOL pricing increases in the 40-50% range.
This would be composed of larger movement up high in programs where rate on line is quite low and less significant movement in the lower layers where ROL is materially higher.
That said, JMP considers cedants’ appetite for rate increases as limited and that pushing above the 50% level in one go will prove difficult. Aggregate programs are likely to see significant change as well.
Without changes to terms and conditions, however, analysts say the rate change needed would likely be unpalatable.
Another conclusion made following JMP’s meetings is that primary insurers are unlikely to retain more risk in the face of steep price increases.
While financially strong, analysts have concluded that large primary insurers have conditioned their stakeholders to expect low volatility in results, and the reinsurance structures they have purchased have proven their value over the past two years.
Additionally, the events of the past two years have weakened catastrophe reserves, implying that while still financially strong, there is added pressure on solvency ratios to continue with current low retentions in order to keep earnings volatility low.
JMP also says it is evident that reinsurers are recalibrating their views of risk following back-to-back record-setting catastrophe years and that ILS is likely to continue to struggle to gain share as longevity of capital is a key decision point.
Lastly, it’s believed that Typhoon Hagibis losses are developing much better than initially feared.
In the immediate wake of Typhoon Hagibis, many reinsurers issued loss estimates to the market that were based upon an industry loss in the $14 bln to $16 bln range.
Estimates of Typhoon Hagibis’ magnitude have come down substantially since then, with much of the market now operating on an $8 bln to $10 bln range. Now, analysts say it’s a question of what will happen to those excess loss reserves.
While that is likely true for many, that we will see it released into earnings as prior year favorable development as we progress through 2020, JMP would not be surprised to see a lack of development from some companies that based their loss on a larger event, particularly those that have legacy U.S. casualty books.
“We would not be surprised to see that cushion covertly reallocated to prior years’ casualty reserves, especially since for the offshore reinsurance group it is difficult for the outside community to follow the trail of reserve dollars once the initial loss is established,” concludes JMP.