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Lagging mid-year renewals points to “permanently” damaged business model: KBW

25th May 2018 - Author: Luke Gallin

In meetings with insurance and reinsurance market participants in Bermuda, analysts at Keefe, Bruyette & Woods (KBW) heard that mid-year catastrophe reinsurance rate increases are lagging those seen at the Jan renewals, suggesting the old business model is “permanently” damaged.

Reinsurance renewalsThe majority of reinsurers KBW spoke with confirmed that mid-year reinsurance rate increases were smaller than those seen at 1/1, with loss-impacted accounts renewing flat to up 5%, and loss-free layers renewing at flat to down 5%.

Loss-impacted retrocessional rate increases are reportedly up 7% to 12% on a risk-adjusted basis, however, this is still somewhat smaller than the 15% to 17% increases witnessed at the January renewals.

Despite rates improving at the January renewals after 2017 catastrophe events, it’s clear that the abundant availability of capacity, from both traditional and alternative providers, has hindered rate increases and limited the ability of the market to improve rates in a sustainable manner.

“We think the industry’s inability to materially raise rates after 2017’s huge catastrophe losses shows that the old catastrophe reinsurance business model is “permanently” impaired, which (along with other factors) should drive sustained consolidation,” says KBW.

Large catastrophe loss activity had been relatively benign in the years leading up to 2017, during which some industry commentary warned that the persistent inflow of alternative capital could alter the traditional reinsurance market cycle of sustainable post-event price hikes, and essentially pricing peaks and troughs.

And, while it’s too early to tell what the market might look like at the end of 2018, the ability and willingness of alternative capital to reload and actually expand in time for the Jan renewals (after its first major test), and the subsequent disappointing rate increases noted by reinsurers, suggests the old market cycle and traditional catastrophe reinsurance business model might well be under threat.

KBW analysts commented on the permanence of alternative, or third-party reinsurance capital: “The consensus is that significant third-party capital (more a function of new funds than of unlocked collateral) still dominates the market, and – despite some speculation about whether this capital can withstand another year of significant catastrophe losses – we think that this capital is best viewed as a permanent feature of the reinsurance landscape, and that the asset class will persist even if individual investors or sums pull out of the market.”

As a result of continued disappointing rate trends, KBW expects to see more industry consolidation both within and beyond Bermuda, and this was also the message from the majority of executives KBW analysts spoke with.

“Several executives suggested that deals are unlikely during hurricane season (June 1-November 30), but we think that abundant traditional and ILS capital could absorb near-term catastrophe exposure that could otherwise impede deals,” says KBW.

Mid-year insurance and reinsurance renewals discussion appears to be turning increasingly negative, and it will be interesting to see the outcomes for participants as reinsurers push for increases in what looks likely to be a buyers market.

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