The Lloyd’s property catastrophe reinsurance market has turned a corner with single-digit rate increases at 1/1 renewals and with further rate hardening expected at mid-year renewals, said Peel Hunt analysts, reflecting views from both the underwriter and broker community after a tour of Lloyd’s.
Rates increased by about 5% across loss-free and by 10-15% on loss-affected property catastrophe reinsurance lines, in line with expectations following 2017’s heavy reinsurance losses for the sector.
However, analysts said further rate increases are necessary before carriers may decide to materially increase their exposures; “underwriters seem happy to soak up reinsurance rate increases without materially expanding their risk profile, delivering underlying margin expansion.”
The market has hardened despite the influx of new capital from the alternative markets into the reinsurance space, although the rate of increase has been dampened by the additional market competition.
“Ultimately, the cycle is finally moving in the right direction and there is enough economic evidence to suggest the cycle should harden further notwithstanding the excess capital in the sector.
“One of the brokers we met suggested that a ‘traditional’ sharp turn in reinsurance cycles, followed by a material weakening, was unlikely to happen in 2018/19. Instead, rates would potentially gradually harden through 2018/19, with alternative capital participating in, but not distorting the hardening cycle.
“Overall, we believe underwriters and brokers accept that property catastrophe rates are under-priced relative to technical requirements and would need to strengthen further to justify investment and growth,” said Peel Hunt analysts.
So far the pricing cycle has firmed across a broader range of classes and geographies than originally anticipated by analysts.
Peel Hunt noted a firming in specialty lines and said they expect further rate increases at U.S. June/July renewals of as much as 10-15%, with signs of the Energy & Marine Cargo market “turning the corner as well.”
This marks a shift from Lloyd’s specialty insurance market, which makes up 70% of Lloyd’s premiums, leaning on the profitability of property catastrophe reinsurance lines which make up just 25-30% of premiums, where underpriced risk exposures have been supported by benign catastrophe years.
So far Lloyd’s underwriters have made much-needed underlying margin improvements at 1/1, and with current predictions for further rate increases in the mid-year renewals, 2018 could bring the long-awaited bottoming out of the soft market cycle and a slight easing of reinsurance pricing pressures.
