The reality that profitability has to be achieved at current pricing levels has altered market expectations for insurers and reinsurers, and while analysts at Berenberg expect rates to improve from where they are today, going forward, pricing is expected to become less cyclical.
Analysts highlight a challenging pricing environment for the last six years, underlined by disappointing rate improvements after the impacts of 2017 and 2018 catastrophe events that failed to drive a hardening market.
The influence of alternative reinsurance capital, and specifically its willingness and ability to reload after 2017 events and its continued, albeit slowed entry into the reinsurance sector after 2018 events, continues to combine and compete with traditional capital, essentially limiting the kind of post-event price hikes witnessed in previous market cycles.
As a result of disappointing rate improvements, “companies have been forced to adapt their pricing expectations,” say Berenberg analysts, adding that it expects “pricing to become less cyclical, with less likelihood of sudden spikes in pricing after loss events.”
Berenberg warns that the less cyclical nature of the industry’s pricing dynamics suggests that re/insurers can no longer expect significant support from the market to improve profitability, ultimately driving global companies to focus on achieving profits at current pricing levels.
But despite this, analysts do expect pricing to improve from where it is currently, supported by certain tailwinds in 2019 that have the potential to offer some respite for firms.
“We believe there is relatively limited downside to current pricing in a number of lines of business. This is because in some lines profitability is already poor and companies are struggling to cover the cost of capital. In this environment, it is difficult to ascertain which participants would be willing to drive pricing lower,” says Berenberg.
Another potential pricing tailwind in 2019 is the impacts of 2018 catastrophe losses and the fact these support price increases in loss-affected lines of business. While losses were above-average in 2018, the strong capitalisation of the reinsurance sector meant that capacity remained plentiful, resulting in rate improvements staying mostly with loss-affected accounts.
Furthermore, analysts highlight that insurance-linked securities (ILS) investors are also demanding higher returns, and the potential for a cyclical decline in ILS capacity in 2019 as a result of the recent loss experience, could also provide some short-term pricing support.
“Overall, we are becoming more positive on the pricing environment in both the speciality and reinsurance space. Industry profitability has become unsustainable and there is therefore limited downside to pricing from current levels, regardless of capital levels in the industry,” say analysts.