Reinsurance industry returns need to fall to as low as 5% above the risk free rate before there is any significant stimulus to cause pricing to move materially upwards, according to analysts at RBC Capital Markets.
Reinsurance pricing has been softening for almost five years now, with further declines in rates seen at the January 2017 renewals. Reports suggest that pricing fell widely by between -3% and as much as -12% in January, which, while a slowdown, showed that there could be further room for margins to become increasingly eroded.
Reinsurers returns on equity have been slipping steadily, but RBC Capital Markets’ analysts believe that they need to slide further before the market will be able to put concerted effort into raising prices materially.
“Rate reductions are due to the continuing high level of industry capital and a lack of market changing losses, in our view,” the analysts explain. “For prices to materially move upwards, returns in the industry will need to fall to 5% above the risk free rate.”
But, even while prices have continued to decline into 2017 the analysts do not see reinsurance industry returns slipping to this level soon.
In fact they say, “We continue to see this as unlikely in 2017,” suggesting that this will be another year where reinsurance firms find making margin increasingly difficult.
Absent a capital eroding event of some description, be that a major catastrophe loss or a financial crisis, the reinsurance market remains amply capitalised to ensure that the majority of companies will still make a return greater than 5% above the risk free rate.
However the margin for error (and profit) is becoming increasingly slim and 2017 will see some companies finding making an adequate return on their underwriting capital very difficult.