Analysts at Peel Hunt have argued that reinsurance rate adequacy still needs to improve, despite some positive momentum at the recent January renewals.
The firm said that adequacy has not yet been achieved despite sharp rate increases on loss affected lines, and questioned whether pricing over the remainder of the year can justify a material increase in property catastrophe exposures.
This may instead depend on reinsurers’ ability to keep retrocession costs low, as well as the level of excess capital available to take on more property catastrophe reinsurance risk on balance sheet rather than through ILS funds.
Overall, Peel Hunt felt that there would be some reinsurers that are willing grow into a hardening market and others that are likely to shrink their exposures and reallocate capital towards specialty insurance lines, were rate increases are currently more pronounced.
The more broad hardening of rates in the specialty market has been a source of optimism for the Lloyd’s market in particular, analysts noted, where specialty classes make up around 70% of market premiums.
Here, insurance rate increases on average beat expectations in 2019 and the outlook for 2020 is showing 3-5% rate increases across portfolios.
In contrast, reinsurance rates were largely flat at the January 1 renewals, while a sharp increase in retrocession rates has further squeezed the returns of those writing property catastrophe reinsurance.
In casualty too the environment remains challenging given the uncertain outlook on US casualty claims inflation, with insurers likely to err on the side of caution and redeploy cash flow to strengthen reserve buffers in the next year or two.
As such, even though casualty rates are increasing, Peel Hunt doubts that rate are sufficiently adequate at present to justify expanding the US casualty book.
However, looking ahead to the April and June/July renewals, analysts see better opportunities for the reinsurance market, due to the more significant catastrophe loss activity in Japan and the US over the last year.
For the few US contracts that did renew in January, pricing momentum showed much more positive signs, with rates up in the low to middle-single digits even for loss free accounts.
