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Overall, mid-year reinsurance renewals to be less negative than June 1st: RBC

13th June 2017 - Author: Luke Gallin

Despite a notable acceleration of price reductions in the reinsurance industry at the June 1st renewals, overall, analysts at RBC Capital Markets expect mid-year renewals to be less negative with prices starting to bottom out.

Reinsurance renewalsPrice declines in the global reinsurance market declined by an average of 5% at the recent June 1st renewals, and up to 10% in some places, as the pace of rate declines accelerated when compared to the slowdown witnessed in January and April, and the 3% average decline witnessed during the same period last year.

“Despite the June renewals being weaker than expected, we believe the mid-year renewals overall will paint a less negative picture and we expect we will see that prices are beginning to bottom out,” says RBC, in a European reinsurance equity research note.

One reason for the acceleration of rate declines at the June renewals, says RBC, concerns the renewal period’s heavy Focus on Florida which is subject to intense competition from alternative reinsurance capital providers and insurance-linked securities (ILS) participants.

Cat bond and ILS issuance has been strong so far in 2017, and its high focus on U.S. property catastrophe risks is a contributing factor to steeper-than-expected rate declines in this area at the recent June renewals, which, largely consists of business placed in Florida, according to RBC analysts.

RBC explains; “Year to date, catastrophe bond issuance has picked up, and with more than half the year still to go there is definitely the potential that 2017 could see the highest issuance on record. We believe that this will have an impact on the price of particularly well modelled catastrophe risks.”

Regardless of the impact of alternative capital and despite the June renewals being weaker than most expected, RBC expects that overall the mid-year renewals will be more positive, with the July renewal season offering a larger scope of business than is seen in June.

RBC expands on this point; “The mid-year renewals overall include data from both the June renewals (focused on Florida) and the July renewals which focus on other areas including US nationwide reinsurance programmes.

“The larger European reinsurers are less focused on the 1 June renewal and therefore we expect that pricing data for the mid-year renewals overall will show a similar trend to that which we have seen so far during 2017 – falling prices but a decline in the rate of reduction.”

Although this is certainly more positive news than an expectation that rate decline acceleration will persist, RBC stresses that there remains little sign that reinsurance pricing will improve in the near future.

Both traditional and alternative reinsurance capital continues to expand its remit, and combined with low interest rates and the benign loss landscape prices are expected to remain down, adding further pressure to reinsurers’ earnings.

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