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Reinsurers’ betting on benign loss year, market bottom elusive: Peel Hunt

10th July 2017 - Author: Luke Gallin

Further, and steeper-than-expected rate declines across the U.S. property catastrophe space at the mid-year renewals suggests the reinsurance market is struggling to find a bottom, as players bank on yet another benign underwriting year, according to analysts at Peel Hunt.

Declining reinsurance profitsCiting reinsurance broker Willis Re’s recent analysis, Peel Hunt, in a recent industry note, highlights U.S. property catastrophe rate declines of between 2.5% – 7.5% at the July renewals, and “broad-based rate weakening across both property & casualty lines.”

The continued rate reductions across the U.S. property catastrophe space at mid-year renewals suggests the bottom of the current, softening pricing cycle is yet to be reached, a trend that is likely to persist absent a major loss event.

“Whilst the property catastrophe reinsurance and retro market has not bottomed out yet, there is further anecdotal evidence that reinsurers are struggling and pricing new business at or below the cost of capital in the ‘hope’ of another benign underwriting year,” says Peel Hunt.

Despite an uptick in catastrophe losses in 2016, the abundance of both traditional and alternative reinsurance capital remains, and combined with the expected high volumes of capital sat on the sidelines waiting to enter when conditions are perhaps more profitable, is adding pressure to an already stressed market.

In recent times, and driven by the softening landscape, reinsurers have been seen to aggressively utilise reserve releases, relax terms and conditions and include unmodeled/poorly understood exposures in an effort to boost profitability amidst a low-interest rate environment and deteriorating underwriting margins.

However, it’s been reported that reserves are thinning, meaning firms have less ability to utilise reserve releases to bolster underwriting returns. Furthermore, Peel Hunt analysts explain that attritional loss ratios are being eroded, which is reducing earnings buffers, and even making some carriers vulnerable to small and medium sized catastrophe events.

Combined, the above market factors suggest some reinsurers could have little room to navigate further, expected rate reductions, and even less room to navigate the marketplace in the event of a significant loss event, which is a matter of when, not if.

“Therefore, it seems the reinsurance sector is banking on another benign catastrophe year to support underwriting profits that are being eroded elsewhere across specialty insurance lines,” says Peel Hunt.

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