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KBW anticipating modest rate improvements at 1/1 renewals

18th December 2018 - Author: Matt Sheehan

Analysts at Keefe, Bruyette & Woods (KBW) are expecting low single-digit increases in reinsurance pricing at the 1 January 2019 renewals due to the significant catastrophe losses experienced this year and some constraint on the supply of alternative capital.

industry-growth-graphKBW acknowledged that the abundance of third-party capital in the property catastrophe space will continue to dampen post-catastrophe rate increases compared to historical highs following events such as Hurricane Andrew, the 9/11 attacks and Hurricane Katrina.

Nevertheless, the substantial losses incurred from Hurricanes Florence and Michael, Typhoons Jebi and Trami, and the recent California wildfires should push up reinsurance renewal pricing to some extent, analysts claimed.

Additionally, several global reinsurers – including AIG, AXA XL, and Zurich – have explicitly stated their intention to lower earnings volatility by buying more property catastrophe reinsurance protection in 2019.

KBW also noted that there are increasing reports of third party capital redemptions that should constrain supply, possibly in response to disappointing 2018 rate increases and returns.

At the same time, inquiries into retro underwriter Markel CATCo’s reserving practices are likely to drive some disruption in the retro market, which may filter into other reinsurance lines’ pricing.

KBW continues to believe that property and casualty (P&C) re/insurance pricing is a function of whether capital providers view expected returns as adequate,

This was the case following the 2017 catastrophes, analysts claimed, when insurance-linked securities (ILS) investors still considered returns to be high enough to warrant continuing investment.

Alternative capacity continues to play a very limited role in underwriting longer-tailed and less modellable lines of business, meaning that traditional insurers are likely to insist on higher returns once it becomes clear that current rates are too low.

Consequently, KBW predicts that Lloyd’s core combined ratio of 99.4% for the twelve months ending 30 June, 2018 will sustain persistent increases in 2019 and beyond.

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