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Reinsurance rates to improve through mid-year 2019: Goldman Sachs

11th January 2019 - Author: Matt Sheehan

While early indications indicate that reinsurance pricing was largely flat at the January 2019 renewals, analysts at Goldman Sachs are confident that rates will improve later in the year at the renewals in April and June.

profitable-growth-reinsuranceThe firm argued that two consecutive years of elevated catastrophe activity should lead to improved pricing in property catastrophe lines, particularly for retrocession and aggregate covers, as well as low excess of loss layers.

Analysts noted that rate increases likely did not materialise at the January renewals due their focus on Europe, which did not experience any large catastrophe events in 2018.

In contrast, markets like Japan and the U.S incurred heavy catastrophe losses due to events like Typhoon Jebi, Hurricanes Michael and Florence, and the California wildfires.

Goldman Sachs anticipates that property cat pricing will improve to mid or single digits for the Japan renewals in April and U.S renewals in June and July.

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The unprecedented levels of recent cat losses (approximately $220 billion over 2017 and 2018) have also forced re/insurers to revisit modelling and probable maximum losses.

This is expected to result in a more cautious approach from the alternative capital market in 2019, with modest contractions in capital already seen in the January renewals.

Analysts proposed that knock-on effects may include alternative capital pulling back from the market or demanding better returns, and insurers pushing for better pricing in casualty lines, which had previously been subsidised by property catastrophe.

Additionally, many large primary insurers, including AIG, AXA XL and Zurich, have indicated that they are looking to increase their reinsurance programs in 2019, which should support pricing for reinsurers with global platforms and diverse capabilities.

Opportunities to raise rates may also result from the withdrawal of Lloyd’s capacity from the market following major initiatives at the marketplace that aim to improve returns, Goldman Sachs noted.

Roughly $2 billion of Lloyd’s capacity has already exited the market and another $2 billion is in the process of improving rate adequacy, although this amount may not be material enough to drive pricing increases in the context of $1.4 trillion of global re/insurance capacity and $70 billion of specialty premiums.

Offsetting these pricing drivers is the ongoing abundance of industry capacity, which has increased over the past two years and may lead to continued competitive pressures on pricing, according to analysts.

Goldman Sachs also cautioned that expectations of property cat rate increases in mid-year may be self-defeating, driving new capital into the market and thereby muting pricing.

Furthermore, aside from the catastrophe losses, the reinsurance industry has not experienced large losses or the need to strengthen reserves from prior years, and is even on track to post an underwriting profit for the year.

Given the reactive nature of the market, analysts do not envision broad rate increases in the absence of large losses.

This dynamic may be further exacerbated by improving investment yields, which are resulting in re/insurers generating greater earnings through net investment income.


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