After record-setting Q3 losses many re/insurers saw their inflated hopes of price hikes dashed in January renewals, a “hype cycle” that RBC Capital Markets analysts believe can be successfully ridden if re/insurers take a long-term view and play it through to the productivity phase.
“For those of you not familiar with the hype cycle, it is most commonly used to reflect the maturity, adoption and application of certain technologies. However, we believe that the cycle can be used to think about the current state of reinsurance pricing. Share prices also reflect this cycle in our view.
RBC explained the hype cycle as having five main stages; “Firstly, after the trigger event, expectations increase. For technologies, this might be the release of a new technology. Early publicity brings focus and some successes, but ultimately the early stage is generally considered a failure overall.
“After the initial hype, this leads to what is known as the trough of disillusionment in which interest declines following the initial failure to deliver. The slope of enlightenment is the next phase. In this stage more instances of benefits emerge and the technology become more widely understood.
“The final stage in the hype cycle is the plateau of productivity where the benefits come through and relevance has paid off.”
For global re/insurers, the pay off could come next year, as this year follows the phases of initial disappointment in January renewals followed by some improvement to mid year renewals when the better priced business begins to earn through in the results, and reinsurers achieve better underlying combined ratios.
According to RBC analysts, the plateau of productivity is expected to come in 2019,“once the full benefits from the strong priced business has earned through, we should enter the plateau of productivity where upside to share prices is likely to tail off.”
