The fact the majority of the reinsurance market is forecasting broad price stabilisation, with localised pockets of hardening, following the impacts of major hurricanes Harvey and Irma which could take catastrophe losses to $100bn+ this year, analysts at RBC Capital Markets say this is the “worst outcome” possible.
Reinsurers are set to have their earnings eroded by the major storms, which added to the first-half 2017 catastrophe events, plus any impacts from Mexican earthquakes, hurricane Maria and adding a normal fourth-quarter catastrophe loads, could take the 2017 industry loss to around $100 billion or higher.
At a time when reinsurance rates are at a low point and reinsurers are set to earn through a lot of the lower premium underwriting business over the years to come, the analysts at RBC said that this was the chance for reinsurers to push hard for broad rate rises.
The analysts call the messaging they saw from major reinsurers at the Monte Carlo Rendez-vous event as “disappointing” explaining that, “We would have expected a more front foot approach arguing for price increases.”
RBC’s analyst team said that even with the high level of industry losses experienced in 2017, which could become one of the heaviest years on record at $100 billion or greater, the reinsurers are set to earn an average return on equity (RoE) of around 6.5% above the five-year average risk free rate.
“We do not believe that returns have been hurt enough,” they wrote in a report today, “We do not expect that ROEs will have been hurt sufficiently to lead a broad market turn. We do however expect to see some localised hardening of rates on loss affected programmes.”
The last time reinsurance rates spiked the average RoE had dropped to around 5% above the risk free, so this year there could be further a profit decline required before the real push for rate rises begins in earnest.
“In order for prices to really move up apart from localised reactions, we believe that the fourth quarter will need to have higher levels of loss than expected. If the fourth quarter is lighter than expected, the ROE could actually even trend higher than we expect,” the analysts explained.
As a result the analysts are expecting the broad stability that most reinsurers discussed in Monte Carlo this year, “Stable prices globally in the reinsurance market is the most likely scenario for pricing.”
But “stable is not positive” after these major loss events and given where returns lie now for reinsurers, the lower premium pricing that feeds through over the coming years will continue to erode profitability even further, if rate rises are only localised.
“We see this as probably the worst outcome for the reinsurers. Above budget losses have impacted earnings and book values; however, these events are unlikely to lead to price hardening outside of loss-affected areas.
“We believe that this is an opportunity missed for the reinsurance market,” the analysts explain.
