The pricing for P&C reinsurance is expected to see a 1-2% premium increase after 2017 global insured losses reached nearly $100 billion, according to Morgan Stanley.
Analysts said; “we reflect~1-2% premium increase due to broad-based P&C reinsurance rate increases in our forecasts for the global reinsurers, of which half is earned in 2018 and half in 2019 with stable pricing thereafter.”
These rate estimates factor in expected higher retrocession costs.
The P&C rate increases will benefit reinsurers who have suffered unexpectedly high earnings losses in Q3.
Lloyd’s insurers stand to benefit from having flexible capital bases where they can move capital to lines where rate rises are more significant.
Rate increases in renewed and in new business written could give Lloyd’s players a much-needed boost – the Lloyd’s market has reportedly been struggling with high expenses and downwards pressure on earnings.
Morgan Stanley analysts forecast a 15% increase in primary property premiums, including loss affected programmes, this rises to 20-25% for property reinsurance and retrocession lines.
Specialty lines such as marine and energy, could see average premium increases of just 2-5%.
Morgan Stanley analysts said European re/insurers appear to be “largely supportive of price increases, or at least the end of price declines, with some indicating similar expected price increases to the levels seen post the large losses in 2011.
“Hannover Re mentioned that it saw an overall price increase of 7% during that time whereas Munich Re showed a 2.5% rate increase for its P&C Re portfolio following the losses in 2011.”
Based on these points Morgan Stanley analysts assume broad-based reinsurance rates to be up ~1-2% in the coming year, however, “our sensitivity analysis indicates that a more positive pricing environment could result in potentially significant earnings upside.
“For example, we calculate that a 5% broad-based rate increase could increase earnings by ~19% on average for the reinsurers and Lloyd’s names under coverage.”
Among reinsurance giants, Hannover Re is believed to have the most exposure to U.S. natural catastrophe, where more significant price increases are expected; from the London market, Lancashire has the most exposure to these loss-affected lines.
SCOR has been given a lower reinsurance rate increase at just 1% because of its relatively low exposure to the U.S, although analysts noted that SCOR’s U.S. exposure has likely increased from the last disclosed 2.8% of premiums due to developing business in the US.
This scenario could bring significant increases in profitability for reinsurers of U.S. P&C in 2018, with the January renewals coming up, firms that made large earnings losses stand to solidify gains and rebalance their accounts, with “limited downside to this scenario and potentially attractive upside,” according to Morgan Stanley
