Analysts at Fitch Ratings have warned Bermudian reinsurers that improved reinsurance market conditions and the subsequent positive influence on underwriting results may not last.
After a more meaningful shift in pricing at the latest renewals season following disappointing rate movements through 2018 and into early 2019, on the back of consecutive heavy loss year, Fitch expects further improvement at the key January 1st 2020 renewals season.
Overall, the ratings agency expects to see property and catastrophe reinsurance rates increase in the low-to-mid single-digit levels, with loss-affected lines and areas experiencing the most dramatic rises.
However, just how meaningful rate improvements are at 1/1 and how sustainable as the market moves further into 2020 remains to be seen, with Fitch warning that market dynamics might well mean that better market conditions “may not prove enduring.”
Specifically, says Fitch, “favourable total investment returns are promoting capital expansion that, combined with any revival of alternative market underwriting capacity, could dampen pricing momentum in a relatively short order.”
The costly impacts of 2017 and 2018 catastrophe events, combined with loss creep from events like typhoon Jebi, has resulted in a slowdown in the growth of alternative, or third-party reinsurance capital. However, investors in the space are increasingly sophisticated and mature and therefore, for the most part, understand the underlying risks of their insurance-linked securities (ILS) investments and the fact that at some point, losses are a certainty.
With this in mind, the entry of new ILS capital has slowed in recent times, especially when compared with the levels seen in 2014 – 2017. However, by no means at all does slowed mean stopped, and the reality appears to be that capital market investors remain attracted to the space and despite recent loss events, see the value of a non-correlated, diversified asset class within their broader investment portfolio.
It remains to be seen just how active the ILS space is at the January renewals and whether a revival will be evident, and just how impactful this will be to property and catastrophe reinsurance rates.
It’s worth remembering that following the devastating impacts of 2017 events, many ILS funds actually reloaded in time for the Jan 2018 renewals in order to take advantage of expected rate rises. However, its presence in a very competitive market served to dampen rate improvements and actually contributed to a disappointing renewal, which, it seems Fitch is aware could happen again, to some extent at least.