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Reinsurers acknowledge flatter pricing cycle: J.P. Morgan

14th September 2018 - Author: Luke Gallin

After speaking with reinsurance market participants at the annual meeting of the industry in Monte Carlo recently, analysts at J.P. Morgan believe there is a “widening acknowledgement that a flatter pricing cycle has emerged”.

flat cycleDuring a prolonged soft market cycle, discussions at previous Monte Carlo conferences had often focused on pricing pressures and what might start to turn rates. However, in light of the muted rate response to 2017 catastrophe events, J.P. Morgan analysts say that a more consensual opinion has emerged across the reinsurance sector.

Following a muted pricing reaction at 1/1 rate momentum has continued to fade through 2018, prompting debate around the traditional reinsurance pricing cycle.

Some industry commentary has suggested that the growing influence of alternative capital and the ease at which it enters the market means that post-event price hikes will be much flatter than before, while some in the space believe that the cycle has disappeared altogether.

Following meetings with reinsurers, brokers, and other industry participants, J.P. Morgan believes that the industry is increasingly accepting the fact that moving forward, a flatter pricing cycle has emerged, and companies are looking at how to develop and expand in a new market normal.

“Most expect small declines in property catastrophe lines assuming a positive loss experience (Florence earlier had a wider range of outcomes), with positive pricing possible in some areas of specialty and casualty.

“Any upward movements in cat pricing are likely to be limited by the continued ready supply of capital to the market, while the downside has become, we believe, constrained by the need to maintain adequate returns,” said J.P. Morgan.

Hurricane Florence continues to pound the Carolinas, but its weakening suggests the wind element has decreased, which in turn lowers the loss potential for re/insurers, although the water and flood threat remains high, so it could still be costly for companies. Latest estimates suggest an insured loss of up to $5 billion, while analysts have said that Florence is likely to only be an earnings event, and be manageable for re/insurers.

In light of this, and absent of course a truly unexpected event, it seems that the marketplace is expecting further pressure on rates at the January 2019 renewals, and has ultimately accepted the fact for now at least, the pricing cycle is flatter.

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