JP Morgan analysts expect upcoming price rises to be most acute in loss-hit contracts and capital-intensive businesses, but rate increases could also filter down to other specialty and commercial insurance markets after one of the most costly periods for natural catastrophes on record became a capital event for the global reinsurance industry.
JP Morgan said price increases of some significance are now “inevitable”, as many insurers and reinsurers call for higher rates.
“We believe the losses in 2017 will be sufficient that a turn in pricing is inevitable, with the most significant increases likely to be seen in loss-hit contracts and more volatile classes such as retrocession, but also some increases seen in non-loss hit areas, such as international property catastrophe, and even other unrelated areas within specialty and commercial lines.”
This could increase exposure for Lloyd’s companies as well as potentially offer better pricing on existing books, driving significant earnings growth, according to analysts.
Hiscox has already reported seeing 10-50% increases on some U.S. property insurance lines.
However, the high degree of uncertainty surrounding industry loss figures means attempts to predict rate improvement would likely be premature.
“We estimate that a 20% increase in cat-exposed premium rates could result in a 12-14% increase in PBT from the existing book, with an equivalent amount possible from writing additional volumes should conditions permit.
“To put this in context it is increasingly clear that 2017 will ultimately be comparable to both 2005 and 2011, which saw catastrophe losses of some $130bn and $140bn respectively.
“The main difference, we believe, is that the past few years have seen natural catastrophe pricing reach new lows, as alternative capital has increasingly taken market share,” said JP Morgan.
Pricing in other larger ticket areas has increasingly come under pressure, with many classes of business such as aviation, marine, energy and political risks under significant pressure.
The first true indications of the state of the market are expected to emerge after January renewals, and then again in Q2 when a large number of property catastrophe and direct and facultative treaties renew.
JP Morgan analysts are optimistic that even loss-free contracts will see improved terms in the following year.