Reinsurers hopes for substantial price increases in the global reinsurance market in the aftermath of recent catastrophes could be dashed as the capital surplus waiting to enter the market could rebalance the scale against downwards pricing pressure.
Research analysts who spoke on a panel at the 2017 Bermuda Reinsurance Conference contradicted the optimistic outlook of industry executives who spoke on earlier panels, pointing to the aggregate balance-sheet strength of reinsurers before and after Hurricanes Harvey, Irma, and Maria, as well as the continuing flows of alternative capital into the industry.
“I think there will be some price increases, but we’re pretty cautious in the approach here because companies have come through this in pretty good shape – and a lot of that has to do with alternative capital,” said Robert Hauff, Managing Director of high grade research at Wells Fargo Securities.
S&P Global Ratings believes that reinsurance pricing will see an upwards swing for the affected regions and business lines-possibly by double digits percentage-wise over time and increases of up to 5% in global pricing at the January renewals.
Prior to the recent catastrophes, which could carry collective insured losses of $100 billion or more, S&P had predicted a 0%-5% rate decline into next year.
The increasing presence of nontraditional players, however, continues to shift market dynamics in the favour of buyers of coverage.
Alternative capital now accounts for around 20% of the global property/casualty (P/C) reinsurance market after doubling in less than a decade.
Jay Gelb, Managing Director of equity research at Barclays Capital, said; “It doesn’t feel like 2001 or 2005 when there were big supply-demand imbalances” that drove prices higher.
“I think the reinsurers will really try to hold the line on price increases, but there’s still a lot of capacity there.”
“I don’t think rates are going to be up as much as people are talking about. I’m thinking more in the 5%-15% range on P/C pricing for Jan. 1,” Gelb said, adding that reinsurance pricing has fallen roughly 40% in the past decade, and so a 10%-15% rise would be only the start of a market recovery.
“We said in the spring that if there were $100 billion of insured losses, it would stabilize pricing–and we’re sticking by that,” said Gelb.
Panelists said one factor that may mitigate the price increases reinsurers expect, is the desire to appease, or at least not lose, longtime customers.
“They want to talk up pricing – and I would too, if I were them – but you have to balance that with economics. Do you want to lose renewals?” said Jay Cohen, Managing Director at Bank of America Merrill Lynch Global Research, adding that return on equity is another important factor.
“The pricing in any line of business will be determined partly by supply-demand, but the other issue is expected returns,” Cohen told conference attendees.
“The question is: Have your expected returns changed because of these losses?”
While re/insurance executives remain hopeful more favourable prices in upcoming renewals will help to offset the blow to balance sheets and capital losses of Q3, it’s seems likely a pricing upturn will be dampened by intensely competitive market conditions.
