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Rate rises underwhelm at January 2018 reinsurance renewals

2nd January 2018 - Author: Steve Evans

Rate rises on loss affected contracts have been underwhelming at the key January 1st reinsurance renewals, with reports suggesting price increases failed to meet reinsurers expectations.

Reinsurance renewalsIn the run up to the renewals it was largely expected that price increases would not live up to the earlier expectations of the major reinsurers, some of which had been calling for prices increases of as much as 40%.

Instead, the FT reports this morning that reinsurance broker Willis Re has recorded just a 7.5% at best rate rise across loss affected accounts.

Following natural catastrophe and man-made disaster losses that are estimated to have cost the insurance and reinsurance industry around $136 billion, the hope among re/insurers had been for a broader repricing of business, both in loss affected lines and across the rest of the sector.

Rates have been falling for consecutive years since at least 2011, resulting in reinsurance pricing at or near all-time lows at recent renewal seasons.

Reinsurers had hoped for a bounce back to a more sustainable level of rate in 2018, following the impacts of hurricanes Harvey, Irma and Maria, as well as other natural disasters including the California wildfires.

But hopes have been dashed at 1/1 2018 renewals, as rate rises fell short of expectations and underwhelmed those seeking the greatest price rises, according to reports.

The reinsurance sector has recapitalised itself much more rapidly than expected, following the major disasters of 2017. Adding to this the insurance-linked securities (ILS) sector has recapitalised and dealt with its losses in a manner which has buoyed investor interest and enthusiasm in re/insurance risk as an asset class, which looks set to help the alternative market continue on its growth curve, adding further competitive pressure for reinsurers to deal with.

Rate increases across the property catastrophe space range from 0% to 7.5%, according to Willis Re, with the key U.S. market seeing rate rises of 2.5% and slightly higher, but in almost all cases the rate rise achieved was lower than had been hoped for by the capacity provider, we’re told.

There were pockets of higher increases, in areas particularly hard hit by recent catastrophe events, including the Caribbean where some reinsurance programs saw rates increase by 20% to as much as 40%, Willis Re reported.

Even retrocessional reinsurers saw rate rises lower than had been hoped for.

Initially, following the hurricances, the retro market had been hoping for 20% to 40% rate increases, but the majority of that market has ultimately seen price rises coming in at below the lower end of that range.

The problem for reinsurers here is that their ability to earn back losses may have been curtailed and should the flow of capital into reinsurance continue throughout 2018 then by the mid-year renewals an even more moderate rate environment may be seen.

Above all else this will put the focus on risk commensurate pricing and efficiency, with reinsurers likely to do whatever they can to prevent rates falling below levels where they can safely underwrite classes of business over the longer-term and a renewed focus on cost-cutting likely in 2018.

Expense ratios remain too high for most reinsurers to deliver the returns they promise shareholders, meaning that it is only by cutting them and finding ways to increase margins on underwritten business that reinsurers can return to a more sustainable profitability.

The major, globally diversified reinsurers are likely to continue to push down the value-chain, writing as much risk at the source as they can, and leveraging the capital markets for efficient reinsurance and retrocession.

Smaller reinsurers may find they need to augment their capacity pools using lower-cost third-party capital structures.

A focus on technology will increase in 2018, with insurtech and reinsurtech guaranteed to remain buzz words, but the focus this year will be on how to make these forays into insurtech and venture investing pay-off, with generating new sources of income through successful technology development and partnership set to increase.

While the catastrophe losses of 2017 have stopped the steady decline in reinsurance rates, it now looks unlikely that they have been sufficiently large to reverse it altogether.

How long rates remain stable over the coming year and beyond is now key for the ability of reinsurers to maintain profits and returns-on-equity.

Underwhelming rate increases were inevitable though, as the reinsurance market has functioned admirably following recent loss events. Which suggests that success will be found by those able to secure higher margins, more direct business and that can lower their own costs-of-capital down to levels more competitive.

All of which makes underwriting discipline and a willingness to turn down poorly priced reinsurance business absolutely key as we move through this New Year.

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