In the wake of Monte Carlo’s 62nd “Rendez-Vous de Septembre”, S&P Global believes 2018 clearly demonstrated that price cycles have become less pronounced, reinforcing its belief that rate increases will fade out in 2019.
The main reason for this pressure, S&P says, is the significant capacity of both traditional and alternative capital, even after the 2017 natural catastrophe losses.
Alternative capital as a source of capacity has consistently expanded, reaching almost 20% of global capacity in the third quarter of 2018. S&P believes this shows that alternative capital passed the 2017 nat cat loss stress test, and is here to stay.
S&P has observed M&A transactions involving primary insurers, reinsurers, and insurance-linked-securities players, indicating that these markets are increasingly converging. The company states that a competitive reinsurance pricing environment will continue to support these kinds of deals going forward.
Indeed, Marsh & Mclennan’s acquisition of JLT for $5.6 billion and the persistent rumours surrounding SCOR only adds weight to this theory.
Despite an overwhelming message of uncertainty regarding cyber risk at Monte Carlo, S&P sees strong business potential so long as reinsurers continue to develop products and partner with their cedants.
The firm says the sector appears to be aware that implicit silent cyber exposure exists within existing policies, such as business interruption and that terms and conditions are being reviewed to avoid implicit exposures.
When discussing the main factors that could drive up volatility for the sector, prospectively, apart from large natural catastrophes, S&P saw most market participants mentioning reserves.
The company says the sector still benefits from favorable reserve developments from prior accident years, but this represented about 4.5% of 2017 combined ratios, compared with 7%-8% on average in the previous eight years.
Given that the recent reinsurance pricing changes were more modest than those seen in the hard market of the early 2000s, says S&P, reserve releases may decrease somewhat in the coming years.
