Citing reinsurance broker Willis Re’s mid-year reinsurance renewal report, analysts at Keefe, Bruyette & Woods (KBW) have warned that the soft market environment is to continue, with hopes of a market floor at the June and July renewals being premature.
Reinsurance rates continued to decline at the mid-year renewals across most geographies and business lines, which, put an end to the hopes of some market executives that the bottom of the softening market cycle was on the horizon.
Analysts at KBW say that they remain cautious on the Bermuda re/insurance market, adding that persistent rate declines suggest a declining property-catastrophe “subsidy” even if losses from the 2017 hurricane season are low, “and we think normalized losses would impede book value growth and share repurchases without meaningfully boosting rates.”
“Although several executives had been cautiously optimistic about reinsurance pricing finding a floor, we don’t think we’re there yet. We doubt the modest recent interest rate uptick justifies rate decreases – the soft market probably hasn’t yet fully played itself out,” warns KBW.
The reinsurance market remains the home to an abundance of capacity from both traditional and alternative sources, which is combining with benign loss activity and low-interest rates to drive persistent rate declines across the majority of business lines, and on both sides of the balance sheet.
Some executives had expected pricing to reach a floor at the mid-year renewals, but steeper-than-expected declines occurred across some business lines, ultimately meaning hopes of a market bottom remained premature.
Furthermore, with little sign of market conditions changing anytime soon, returns are expected to remain under pressure for the remainder of 2017 and into 2018, absent a truly market changing event.
Potentially applying further pressures to an already stressed industry, KBW explains that “Willis also expects upcoming U.S. catastrophe model changes to incorporate lower expected losses, which in turn implies continued rate declines.”
“Overall, Willis Re’s July 1 reinsurance pricing report struck us as pretty negative, with loss-free catastrophe accounts’ rates (which we view as the best proxy for reinsurer appetites) declining in all regions except South Africa and China,” explains KBW.
