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Reinsurance price declines to continue into 2018, benefiting insurers

13th February 2017 - Author: Steve Evans

Reinsurance prices are forecast as likely to continue declining at similar rates to those seen at the recent January renewals into 2018, with the result being an ongoing opportunity for insurers to benefit from cheaper risk capital.

That’s the view of analysts at Canaccord Genuity, who highlight the benefits that lower reinsurance pricing will bring to Lloyd’s of London insurers over the coming year and beyond in a recent report.

“While the pace of reinsurance price declines slowed at 1/1, this pace of decline was still in the mid-single digits, and slightly greater, we believe, than for most direct classes,” the analysts explain.

As reinsurance price declines continue to outpace direct insurance pricing, the opportunity to benefit from a pricing differential exists for primary direct underwriters, which could help to increase demand for reinsurance capacity.

The analysts note that; “Lloyd’s insurers are relatively big buyers of reinsurance, and should be able to offset some of this pricing pressure through cheaper cost of reinsurance.”

RMS

However, they do clarify that the net outcome could still be a decline for the Lloyd’s of London re/insurers, especially those that write both direct and reinsurance lines.

Canaccord Genuity’s analysts believe that the trend for declining prices in reinsurance is likely to continue, as there has been no market losses or events that would cause a reversal of the trend.

“Absent a material withdrawal in industry capacity, which is not in our forecasts, we also assume a similar level of price decline into 2018,” they say, not the first of the equity analysts to make this prediction that reinsurance pricing is set to continue its decline.

The lower cost of reinsurance can and is helping some to manage price pressure better, and in cases where a company can benefit from higher direct rates compared to reinsurance there is a differential that improves the capital position.

But even with an ability to perhaps arbitrage the market to a degree, by capitalising on low reinsurance pricing, the continued decline will weigh on primary direct rates as well, so ultimately the outlook is one of lower returns.

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