The increased sophistication of the insurance and reinsurance industry, combined with the impacts of a prolonged soft market state, suggests that pricing won’t peak at the upcoming January 1st, 2021 renewals, according to industry experts.
While market sentiment points to some fairly significant rate improvements at the key 1/1 reinsurance renewals, it remains to be seen whether the expected positive momentum will be sustained.
After enduring a prolonged soft market, which included some extremely large loss years for global re/insurers, as well as the continuation of the lower for longer interest rate environment, carriers will be hoping that current market firming persists and intensifies.
During the opening panel of our recently held, virtual re/insurance and insurance-linked securities (ILS) conference, Prospectus 2021, the longevity of the current rate environment was discussed.
“I don’t think that we’re going to hit a January peak and start tapering off,” said Linda Johnson, Head of Legacy Practice, TigerRisk Partners. “I really believe that the insurance industry is getting more sophisticated and really thinking in terms of long-term cost of risk. And, so, perhaps I’m overly optimistic, but I believe that as an insurance industry we’re getting smarter, we’re getting better every year.
“We need to charge an appropriate amount for the risk that we’re taking. We’re in a world of great risk, and again, with the interest rates not providing any investment income cushion, we need to preserve our capital and charge the correct amount.”
“I’m hoping that we maintain our discipline. I do not believe we’re at a point where insurance companies are getting an excessive return. But, it’s important that we also don’t go too far, don’t become greedy, don’t charge more than what is appropriate for the risk involved,” she continued.
Fellow panellist David Flandro, Managing Director of Analytics at Hyperion X, offered a more micro outlook on pricing ahead of Jan 1st.
He explained that if retrocession rates harden at 1/1 the way they look set to, at the moment, in terms of non-marine retro cat XoL, then the market is going to be back in the range that it was early post-2004/05, but not quite at the level seen in 07/08.
“But the thing about that retro market is that that hard pricing environment was actually quite sustained, it wasn’t just a spike, it lasted for several years. And, what I’m saying is that we’re getting back up into that range for the first time, really, since Hurricane Sandy, with retro, by my reckoning,” he explained.
Commenting on the reinsurance market more broadly, Flandro said that even if there’s additional, significant hardening at 1/1, the marketplace is still some way off where it was post 04/05.
“And, then, if you look at commercial and specialty lines, we still haven’t got to the peaks that we were at during the last liability crisis,” he continued.
Adding: “I think it was Brian Duperreault who said that you spend one of seven years in your career in a hard market, right. I think that we haven’t really had a truly hard market now for quite a bit longer than that. But, I think that perhaps because of that and because of the bottom that we’re coming off of, there is some scope for additional sustainability this time.
“Everybody’s right, this isn’t about capital supply, there’s plenty of capital at least on paper, right now. It is about risk premia and it’s also about reverting to the mean, if you will.”
Joanna Syroka, Director of New Markets at Fermat Capital Management, LLC, agreed that the outlook for 2021 does appear to be a continued hardening of the market.
“And, as David and Linda have mentioned, this is an underwriting driven hardening, rather than a loss of capital hardening. And, I think the ILS market and the traditional reinsurance market are in solidarity on that, and I see the ILS market supporting the traditional market. So, I think this is one where both markets are aligned,” she explained.
The associate sponsor of the inaugural Prospectus 2021, of which all sessions can be viewed on-demand for free, was Kroll Bond Rating Agency (KBRA) and during the event’s opening panel, the audience heard from the rating agency’s Managing Director and Global Head of Insurance, Peter Giacone.
He concurred that it does seem to be underlying trends that are driving the pricing changes across the market, which in turn suggests that again, January 1st is unlikely to be the peak.
“From a rating agency perspective,” he stated, “what we’re going to see is a focus on what management is doing, and how companies are responding and how participants are responding.
“I think this provides tremendous opportunities, as I’ve said, and we’re going to see how management, in particular risk management, which is a big focus of what we look at from a ratings perspective, is something that’s going to receive additional focus.
“And, it is a reason we’re actually, again, kind of stable outlook in terms of the industry going forward, and we look forward to the exciting developments that are likely going to be spooling out in the days and weeks ahead.”
To watch every session on-demand please visit the Prospectus 2021 website.
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