Moody’s has reported that January 1 reinsurance price renewals were lower than the market expected following a year of substantial natural catastrophe losses, but still expects reinsurers’ profitability to improve modestly based on rate increases, efficiency initiatives, and slowly rising interest rates.
Costly disasters in 2017 like the series of Atlantic Hurricanes and California wildfires caused some reinsurers to start 2018 with moderately lower capital levels, leading to increasing dependence on retrocession and alternative capital to maintain gross capacity.
Reinsurance prices increased moderately at the January 1 reinsurance renewals, with average increases of 4% for U.S property exposures and 0-7.5% for catastrophe-exposed U.S property cover.
Prices for loss affected business exhibited stronger increases, with U.S property-catastrophe risk rising 5-10% and Caribbean property-catastrophe cover rising 20-40%.
These figures indicate that average price increases at July 1 renewals – when most non-proportional U.S and Caribbean covers roll over – may be more pronounced, although Moody’s expects the abundance of traditional and alternative reinsurance capital to dampen increases.
Thus, while Moody’s expects reinsurers’ profitability to increase, it will likely do so at a level significantly below what was reported in 2012/2013.
Additionally, Moody’s anticipates that rising yields will positively impact reinsurers’ earnings, with yield on 10-year U.S, German, and UK government bonds expected to increase by 0.6%, 0.82%, and 0.73% respectively by 2019.
It will take some time for rising interest rates to significantly affect reinsurer’s investment income, although companies with shorter duration investment portfolios will benefit earlier.
Moody’s also claims that rising interest rates will support reinsurance price increases for property-catastrophe business, as alternative capital investors will likely demand increased pricing on the insurance risk they assume in response to increased return expectations.
Finally, Moody’s expects reinsurers’ profitability to be supported by cost-saving and efficiency initiatives, which are funding investments in technology and innovation and are becoming increasingly necessary as reinsurers try to remain relevant in a changing marketplace.