Reinsurance pricing is likely to come under further pressure at 1 January 2019 renewals due to below-average catastrophe losses over 3Q 2018 and a sustained influx of alternative capital, according to investment bank Goldman Sachs.
Property catastrophe modelling firms estimate that insured industry losses over the third quarter of 2018 will amount to between $16 billion and $20 billion, which compares with catastrophe losses of $100 billion for the same period last year and 10-year average of $20 billion.
These losses will also largely be contained in the primary layers, Goldman Sachs said, with only modest breaches of reinsurance attachments for events in the U.S and of reinsurance aggregate covers in Japan.
Absent any very large catastrophe losses during Q4, reinsurance renewal pricing at 1 January is therefore likely to continue the trend of dissipating rate increases and declines seen at mid-year renewals.
Goldman Sachs expects the P&C industry to respond to this pressure by continuing to focus on mergers and acquisitions (M&A) deals, with particular focus on U.S specialty insurers and Bermudian insurers, of which only six publicly-traded companies remain.
The firm added that revenue growth, rather than extracting efficiencies or improving underwriting, will constitute the main acquirer rationale, and noted that mounting shareholder pressure may also be a major driver for deals.
Appetite for alternative capital in the re/insurance industry also remains high, with $11.7 billion in cat bonds and insurance-linked securities (ILS) issued year-to-date ($4.3 billion net issuance), up from $10.6 billion in 2017 ($5.0 billion net issuance).
Overall, Goldman Sachs continues to prefer personal auto over commercial lines, and believes that market trends in primary commercial lines continue to be better than in reinsurance.
It anticipates modest year-on-year underlying underwriting margin erosion in reinsurance and commercial business and flat margins in personal lines.