Financial giant Morgan Stanley has reflected on the Monte Carlo Rendezvous, saying that participants had predicted pricing to ‘remain upbeat’.
Morgan Stanley wrote in a new note: “The recent benign hurricane season and rising interest rates do not seem to be an area of concern for pricing momentum. As expected, the reasons for strong pricing momentum flagged by industry participants were: 1) capital scarcity, 2) inflation trends, 3) uncertainty coming from climate change, which all suggest continued pricing momentum is a reasonable assumption.”
It added: “What is interesting is that pricing momentum is expected to remain strong in all lines of business such as property cat, casualty, and specialty, despite reasonable capacity in casualty and specialty underwriting.”
Morgan Stanley said that two strategies were continuing to play out at Monte Carlo. It said some carriers were actively shedding cat risk to smooth earnings. Meanwhile, it said that other are selectively growing their cat book.
The reason for the first group, the ones shedding risk, is because these companies are diversifying their portfolios into specialty and casualty (re)insurance lines with the mindset that the market will not pay for more cat exposure, no matter how attractive the pricing backdrop.
The second, those growing their cat book, said Morgan Stanley, are generally populated by Bermuda reinsurers, with the second camp mainly populated by the larger global reinsurers. Morgan Stanley said that with casualty pricing near a peak, and inflation having a levered effect on the longer-term lines, it thought it prudent to monitor the longer-term effectiveness of the first strategy.
The firm also said that underlying risks cited in its meetings were related to climate change, social claims inflation, and persistent economic inflation.
It said: “The climate change debate remains at the forefront, as there remains a risk that climate change could continue to lead to a greater-than-linear increase in loss trends in coming years. At the moment, the hurricane season appears to be benign, but industry participants believe that this might not be seen as reducing climate change risk as it could be one-off in nature. Persistent inflation risk remains a key risk for the industry, as it may lead to reserve reviews at some point leading to increasing reserve charges. Similarly, it is too early to call whether social claims inflation risk for casualty business lines is over.”
Overall, it said that strong pricing momentum and growing demand for reinsurance bodes well for the performance of the reinsurance sector. However, it warned of limited visibility on a material rerating of the reinsurance sub- sector in the medium to long term.
It added: “Reinsurance pricing momentum for most lines of business remains firm, and, based on our discussions, it seems fair to say that forward looking pricing momentum is well ahead of loss cost inflation and potential model changes – all of which bodes well for profitability for 2023 and beyond.”
It went on: “We would reiterate that the outlook for the reinsurers/Bermuda insurers remains strong in the short term. However, it remains to be seen if current momentum is enough from a re- rating perspective, given structural concerns over climate change for property cat business and social claims inflation for casualty business.”
