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Reinsurance rates inadequate to deploy additional capital: Grandisson, Arch

15th February 2019 - Author: Luke Gallin

Despite some signs of tightening capacity within the retrocession and facultative markets, in many instances, rate levels relative to risk remain inadequate to deploy additional capital, according to Marc Grandisson, President and Chief Executive Officer (CEO) of Arch Capital Group.

Marc Grandisson ArchSpeaking during the Bermuda-based insurer and reinsurer’s Q4 and full-year 2018 earnings call, President and CEO Grandisson noted improved, albeit less-than-expected property catastrophe reinsurance rates, on the back of two consecutive years of heavy cat losses.

Numerous global insurers and reinsurers have now reported their fourth-quarter and full-year 2018 results, with many company executives highlighting improved but still disappointing rate movements at the January 1st, 2019 renewals.

“On average, property cat rate increases at Jan 1st are positive, but below expectations given the record level of insured cat losses that were reported in the past two years.

“There are some signs of tightening capacity within the retro and facultative markets, but in many cases, rate levels relative to risk remain inadequate to deploy additional capital, from our perspective,” said Grandisson.

In light of the muted rate response at the January 2019 renewals, some in the industry anticipate greater rate improvements during the April and the mid-year renewals, driven by the fact loss-impacted Japanese and U.S. business is up for renewal, respectively.

Grandisson said there’s reason to believe that some rate improvements might occur throughout the year, but highlighted that uncertainty surrounding both the expected volume of capital and the return on capital within property catastrophe markets makes it difficult to predict where rates will be by the end of 2019.

The reinsurance market remains well-capitalised despite two substantial loss years, and, although the inflow of alternative, or third-party reinsurance capital slowed at 1/1 2019 when compared with the previous year, this growing sub-sector of the reinsurance industry continues to play an important role in the market and subsequently influence pricing metrics.

Sometime ago, when the reinsurance market was struggling through a prolonged and very challenging soft market environment, Grandisson had said that reinsurance rates needed to improve by 35% to 40% to provide Arch with the risk-adjusted return that it believes is appropriate.

“We’ve had since maybe 10% to 12% rate increases, so that tells you we’re probably 25% to 30% short of rate changes to really get there.

“And again, I want to caution everyone that’s listening to this, saying that that 25% is not going to come across the board all at once. There are some pockets that need a bit more than this, some that need a little bit less than this. But that gives you a flavour of how much more we believe we need, to get us to start going down the path of deploying more capital,” said Grandisson.

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