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Retro market to drive top-down rate changes at 1/1, says Validus execs

1st November 2017 - Author: Luke Gallin

The re/insurance industry’s heavy reliance on retrocessional capacity will drive a top-down market change for rates across affected business lines, with traditional reinsurers and primary players pushing for rate increases as retro pricing jumps sharply at January renewals, according to Validus Holdings’ executives.

Reinsurance renewals“As we have described to you in the past, the industry’s heavy reliance on a rather in-retrocession market creates a top-down driven market change for affected classes. The retrocession market is the tip of the spear, and it had been disproportionately affected by these events,” said Validus Chairman of the Board and Chief Executive Officer (CEO), Ed Noonan, during the company’s third-quarter earnings call.

Looking forward to the key January 1st, 2018 renewals season, and Noonan expects the impacts of third-quarter catastrophe events to drive sharp rate increases in the retro market, which in turn will push reinsurers to meaningfully increase rates to account for the higher cost of retro protection and rate inadequacy.

Furthermore, the higher cost of reinsurance coverage at 1/1 will see primary insurers push for higher rate increases as well, while Noonan expects the primary market to raise prices for wind-exposed risks, adding that this could take time to gain momentum.

Retrocessionaires are proving their worth this year, paying a substantial portion of the industries overall losses from recent catastrophe events. Having shown such strong support for the largest companies across the industry, the retro market will likely be hoping it’s paid back with increased rates at 1/1.

Ultimately, Noonan expects to see “very attractive pricing” in the retro market at 1/1, and anticipates reinsurance rates increasing meaningfully into the double-digits in the states, with loss-affected business increasing sharply.

Globally, Noonan expects “insurance pricing will be a bit spottier,” but anticipates corrected pricing in Europe and in Latin America.

“We are clearly in a good pricing environment for short-tail risk,” said Noonan.

Also speaking during the Q3 earnings call, President of Validus Group and CEO of the firm’s reinsurance arm, Validus Re, Kean Driscoll, said; “Retro price increases and reinsurance rate increases are all going to drive an increased cost of capital, and we are also coming from the position where underlying returns were not sufficient to support the relative volatility of the cat potential.

“The market probably was in a bit of malaise after 11 years of pretty benign hurricane activity, but I think we are out of that malaise, so we expect rate increases throughout the risk spectrum.”

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