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Reinsurance rates not yet in line with risks: Moody’s

25th February 2021 - Author: Matt Sheehan

Analysts at Moody’s are predicting that reinsurance rates will continue to rise significantly throughout 2021, on the basis that operating returns are not compensating reinsurers for the risks they assume.

While the January renewals did yield some positive pricing trends for reinsurers, rates are still remain well below levels seen in 2012 and will need to increase further to provide risk-adjusted returns, Moody’s says.

Prices at 1/1 reflected claims from the coronavirus pandemic, rising casualty loss cost trends, low insterest rates, and recent volatility in natural catastrophe losses, particularly for higher frequency small to mid-sized events.

According to Willis Re, prices for loss-affected property catastrophe accounts rose across all regions at January 1, with US business reporting the strongest price gains from 10%-25%, while loss-free US property catastrophe accounts increased less, from 5%-15%.

The more muted increase in loss-free property catastrophe reinsurance prices was due to their European focus, Moody’s notes, where most business tends to be proportional and reinsurers benefit from rising prices on primary insurance through quota-share cessions.

Casualty reinsurance prices also saw broad-based increases, with rates for loss-affected accounts up 10%-25% in Europe and up to 30% for certain US liability lines, according to Willis Re. The main drivers of casualty rate increases included rising loss cost trends driven by social inflation, as well as low interest rates.

And reinsurers also benefited from improved terms and conditions, in some cases settling for a lower rate increase in exchange for more favourable terms.

However, Moody’s believes that, because the current upward pricing cycle is driven by risk perception and not capacity constraints, insurers have been more resistant to price increases on loss-free accounts where risk is perceived to be lower.

In addition, insurers retained more risk in cases where they perceived price increases as too high, and this trend also extended to reinsurers, where retrocession coverage was more available as the renewal season progressed.

“While higher risk retention enables (re)insurers to enjoy more of the upside of rising prices, it is likely to raise earnings volatility, particularly in the event of an above average catastrophe loss year,” Moody’s concluded.

“We expect broad-based price increases in April and July, the key renewal dates for Japanese and US reinsurance contracts, respectively. However, the extent of price increases will be dependent on the balance between the supply of capacity and the demand for reinsurance coverage.”

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