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Low ROE levels in 2017 could turn market: RBC Capital Markets

8th November 2017 - Author: Marianne Lehnis

At 3.2% above the 5 year risk free average European reinsurers’ low Return On Equity levels could lead to a market turn, according to RBC Capital Markets.

The biggest uncertainty surrounding the market in coming months is how wide the pricing uptick will be and whether or not it’ll include prices in unaffected regions.

“Based on previous losses and market reactions, we believe that this is a sufficiently low-level of return to ensure that prices increase,” said RBC.

While patterns from previous years show its unlikely Q3 losses will lead to widespread market rate increases, potential for this to occur could come if alternative capital struggles to reload ahead of the January renewals.

After hurricanes Katrina, Rita and Wilma caused large U.S. losses in 2006, only the U.S. market saw rate increases while small rate decreases were experienced across Europe and Asia.

In 2012, after the Japanese earthquake and Tsunami and the Thai Floods caused large Asia losses, Asian pricing increased, but this dwarfed the price increases in other regions.

“The obstacle to a broader based market turn is convincing clients that have not incurred losses on their programmes to pay higher prices for their cover; evidence from 2005 post hurricanes Katrina, Rita, Wilma suggests that this could be difficult,” RBC said.

The areas of the best price increases are forecast for the property catastrophe segment since this area would have incurred much of the losses plus alternative capital’s disproportionate influence in this line of business.

RBC noted that in 2002, the year after the World Trade Centre losses, prices in property catastrophe insurance rose to a similar extent in the three major regions for property catastrophe cover.

“Property direct and facultative risks should also see substantial price increases as this is an area that the Lloyd’s market specialises in, and is likely to have seen high levels of loss in Q3 2017.

“Outside of catastrophe exposed property lines of business, our base case scenario is for a widespread stabilisation of prices. There is the potential for prices in other lines to begin to increase but we have not factored this into our estimates yet,” RBC concluded.

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