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Jefferies forecasts multi-year reinsurance price increases

23rd November 2020 - Author: Matt Sheehan

Analysts at financial services company Jefferies have forecast that reinsurance rate rises could continue beyond the 2021 renewals, leading to multi-year increases.

business-growth“With the 2021 reinsurance renewals approaching, we expect prices to rise materially, and, as conditions in 2020 are reminiscent of 2001, multi-year rises may be possible,” analysts said.

The firm believes that conditions are similar to the market environment two decades ago, when a confluence of inflationary factors resulted in multiple years of firming reinsurance rates.

Back in 2001, inflationary factors included high exposure to equities on the asset side of the industry balance sheet, which made insurers vulnerable to the fallout from the dot com bubble.

Additionally, on the liability side of the industry balance sheet, reinsurers were increasingly finding that material reserve strengthening was necessary, Jefferies notes.

RMS

And finally, industry earnings were cut by 9/11, the Air Lanka war loss, the Hughes satellites, Petrobras rigs, Toulouse refinery explosion and Enron.

Turning to the current market in 2020, Jefferies argues that a similar range of factors is evident, making multi-year price rises in reinsurance a distinct possibility.

For instance, on the asset side of the industry balance sheet, reinsurers are currently beset by low interest rates and equity market volatility.

Likewise, on the liability side, Jefferies says reinsurers are increasingly finding that material reserve strengthening is necessary, due to underlying causes ranging from the opioids crisis, chemical posioning cases, to social inflation.

Furthermore, the industry’s earnings have been depressed for an almost unprecedented four consecutive years, as a result of natural catastrophes, unusually high man-made losses and the pandemic.

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