Kevin O’Donnell, the President and Chief Executive Officer (CEO) of Bermudian reinsurer RenaissanceRe (RenRe), believes that “necessary” but insufficient rate increases witnessed in the reinsurance market will be sustainable moving forward.
RenRe reported significant growth in the second-quarter of 2019, with its gross premiums underwritten rising by 51%, while at the same it took advantage of strong price rises across many areas of its business.
Speaking during the reinsurer’s second-quarter 2019 earnings call, O’Donnell discussed the sustainability of rate increases, noting that this remains an important concern for the marketplace.
The industry experienced rate increases of between 15% and 20% at the June 1st Florida renewals and O’Donnell explained that in the property market, rates are being strongly supported by both insurance and reinsurance changes. Adding that primary carriers are simultaneously looking to raise rates while at the same time reduce line sizes.
“In a similar vein, due to a changing view of risk reinsurers are seeking rate, and most importantly willing to reduce limits, which is a dynamic that has not existed for quite some time,” said O’Donnell.
The RenRe CEO states that these dynamics are in response to a reduction in the availability of alternative, or third-party reinsurance capital (driven by two years of cat losses) and also a market-wide realisation that risk returns have been far below long-term acceptable levels – which in turn has increased market discipline.
Essentially, this means that both alternative and traditional providers of reinsurance capital are aligned in regard to pricing, and combined are putting more pressure on rates.
“Because of this, I believe current rate trends will be sustained moving forward. I also expect that the de facto regulators such as lawyers and the rating agencies will continue to maintain pressure on carriers, encouraging them to improve results. These pressures play to our strengths,” said O’Donnell.
Of course, with the 2019 Atlantic hurricane season underway, it only takes one major storm to shift market dynamics. O’Donnell was questioned on his optimistic stance on reinsurance rates moving forward in light of an average wind season.
“In it being a normal wind season, I feel optimistic that the trends that are pushing rate, a lot of them coming from the primary insurance side, will persist. I think there’s a general realization within the reinsurance market, that particularly markets like Florida, it’s been a buyers’ market for a long time, and it’s been a small shift idly to rates improving, but that needs to go further,” said O’Donnell.
Emphasising the fact that from where RenRe stands rate improvements need to go further still, O’Donnell said that while these “rate increases were necessary,” they were “not sufficient” and were only up by high single-digits on a risk-adjusted basis.
In light of the high cat losses in 2017 and 2018, coupled with ongoing loss creep from some of the events, much of the talk around rates in the reinsurance sector has focused on the property market. However, O’Donnell underlined that the firm is seeing positive momentum on underlying rates across numerous lines within casualty, which, similar to property, is being impacted by rising primary rates due to the removal of capital and reduced line sizes.
“I believe the rate being sought by insurers as needed, and that they are committed to improving rate adequacy. So, I remain optimistic that we have a degree of sustainability for rate in this market as well,” said O’Donnell.
It will be interesting to see how sustainable the current positive rate trend is across the global reinsurance market as the sector navigates the ongoing Atlantic hurricane season, loss creep, and a still competitive environment. As companies continue to report their Q2 and H1 2019 results, improved market discipline is becoming a key theme across the reinsurance sector.
