Despite pricing in the global reinsurance industry increasing at the January 1st renewals after third and fourth-quarter 2017 catastrophe events, reinsurance broker Aon Benfield expects this trend to be short-lived as capital continues to enter the market, and warns it could have a lasting impact on the reinsurance market.
According to Impact Forecasting, the catastrophe risk modelling arm of reinsurance broker Aon Benfield, economic losses from natural catastrophe events in 2017 totalled $320 billion, with $128 billion of this being covered re/insurance.
This makes it the third costliest natural catastrophe year on record for global insurers and reinsurers, behind only 2005 and 2011, and fuelled hopes of rate increases at the January 1st 2018 renewals after five years of falling rates.
Aon Benfield, in its new January 2018 Reinsurance Market Outlook, notes that reinsurance pricing has moved up in business lines and regions most affected by recent loss events, but warns that it expects this trend to be “relatively short-lived, given the amount of new capital entering the sector.”
“This may have a long-term consequences for the structure of the reinsurance market,” says Aon Benfield.
Despite a number of costly events occurring in the second-half of 2017, the benign loss environment of previous years and the growth of alternative reinsurance capital meant the industry was well-capitalised to absorb the losses. Alternative capital has grown in size from $10 billion in 2005 to $90 billion in 2017, and subsequently plays an increasingly important role in the catastrophe reinsurance space.
Catastrophe events in 2017 provide the first real test for the alternative capital space, and while capital markets investors experienced losses, “investors have responded by showing strong appetite for an asset class that is now viewed as being relatively more attractive.
“The sector has therefore proved its worth and come of age as a committed source of reinsurance capacity,” explains Aon Benfield.
The amount of capacity in the reinsurance space, from both traditional and alternative sources, even after the third costliest natural catastrophe loss year on record, could be a threat to the structure of the reinsurance market, as post-event price hikes are potentially limited by the availability of new capital and its ease at entering the marketplace.
“Underwriting capacity remains intact for all lines of reinsurance, adverse rating actions have been few and far between and the capital management activities of most large reinsurers continue as planned,” says Aon Benfield.
Adding; “The main sensitivities going forward are further large losses, unexpected movements in interest rates and developments that drive changes in market structure.”