Analysts at Jefferies have reported a marked improvement in terms and conditions (T&Cs) at the recent January 1 2020 reinsurance renewals, which it believes will ultimately lead to a knock-on improvement in margins.
Jefferies noted that the tightening of T&Cs is perhaps unsurprising given that terms are usually the last thing to slip in a soft market.
Reinsurers need to maintain premiums volume to preserve their expense ratio efficiency in a soft market, but with 2021 showing more hard market signals, buyers would rather compromise on terms than pay higher premiums.
Consequently, Jefferies suspects that terms and conditions changes hide the true extent of the trough in real pricing, as it is the last thing to go and the first thing to come back.
Overall, US prices looked most promising at 1/1, with casualty re-rating faster than property and some specialty lines showing extremely large rises in some cases, particularly for aerospace, accident and trade credit insurance.
Moreover, as prices for loss hit and loss free contracts diverge, Jefferies believes that higher quality reinsurers may have a retrocession cost advantage.
Another notable conclusion drawn by Jefferies was that the pricing changes for contracts incurring claims in 2020 have been particularly hard hit. As such, the market seems to be punishing cedant underperformance severely.
This gives those more profitable primary insurers a cost advantage that will compound their existing outperformance.
Jefferies expects that a similar dynamic is occurring in the retrocession market, which should benefit larger reinsurers such as Munich Re and Hannover Re.