Morgan Stanley analysts predict reinsurance pricing will continue to soften in the 0-5% range as traditional and alternative reinsurance capital attracts increasing numbers of investors seeking the safety of uncorrelated assets, making a market turn unlikely in the near future.
Pricing pressure in reinsurance has followed the trend of decline of recent years, analysts said the June 1st Florida renewals showed declines were on the far-end of the predicted decreases, down by 5%.
JLT Re estimates that traditional reinsurance capital has grown by more than 40% over the last 10 years to reach $260 billion, while alternative capital has more than doubled to $60 billion.
The 2008 financial crisis spurred an increased interest in the safety of uncorrelated assets, leading to a rapid injection of capital into the reinsurance market.
This has changed the playing field for traditional players, where excess of supply over demand has led to intense pricing pressure and several years of double-digit pricing declines.
These factors are coupled with stagnating demand as primary insurers consolidate and reinsurance buying has become much more efficient, for instance through cedents centralizing reinsurance buying or increasing retentions.
Analysts, said; “Premiums have totalled $255BN at the end of 2016, meaning that the market is seeing a large amount of excess supply.
“It’s widely understood that there needs to be a large market event to reduce the amount of capital in the market, as well as to ‘test’ the alternative reinsurance markets which have not yet seen a large shock.”
Morgan Stanley analysts predict that with current surplus of supply compared with demand, large-scale market loss events would not be enough to shift the imbalance.
A combination of large catastrophe events, reserve releases deterioration and pressure on investment yields would be more likely to create serious movement in market pricing.
However, according to the Morgan Stanley report, while continued reserve release levels are unsustainable in the future, global reinsurers currently remain mostly sufficiently capitalised.
And while investment income yields have been subdued, analysts noted that firm’s have been buoyed up by improved reinvestment yields; “There is superior sustainable capital return with high total yields supported by operational ongoing capital generation, and we expect this capital return to continue to be a key differentiator to support performance.”
These factors mean many of the needed requirements for a market shift are not yet in place, and although new and emerging large-scale risks are ahead of the industry, for now the question of how reinsurers will tie themselves over through the transition period, which could stretch on for a while yet, will remain on the plates of market leaders.
