Targeted price increases limited to loss-affected policies and regions were evident at the recent January 1st renewals, and while the overall process was orderly, it was somewhat of a disappointment following recent industry losses, says ratings agency S&P.
The ratings agency states that during the most recent renewal period, it witnessed increased regionalisation of reinsurance pricing. Historically, more meaningful and sustainable reinsurance rate increases have come to fruition following large loss-years and the subsequent removal of available capacity, ultimately shifting the supply/demand balance in the market.
However, the rise of alternative reinsurance capital during a time of benign loss experience has swelled the amount of available dedicated reinsurance capital, especially for catastrophe risk in peak zones such as U.S. wind, for example.
Following 2017 cat events, which is one of the costliest loss years on record for the reinsurance industry, hopes of large rate increases at the January 2018 renewals were dented as third-party capital reloaded in time to take advantage of any price movements at 1/1.
Reinsurers remained under significant pressure throughout 2018 as rates continued to fade, before the second-half of the year saw numerous catastrophe events result in another above-average loss year for the industry.
With this in mind, industry participants again hoped for rate increases at the January 2019 renewals, with market commentary suggesting a slowdown in the entry of alternative capital following consecutive loss years. According to S&P, however, the recent renewals were again a disappointment for most.
“Based on our initial discussions with reinsurers and review of brokers’ reports, rate increases during the January 2019 renewals were somewhat disappointing.
“In general, the renewal process was orderly but late in certain instances, as reinsurers were still evaluating the potential impact from the fourth-quarter catastrophe losses,” says S&P.
The ratings agency also notes that it saw more and more regionalisation of reinsurance pricing at 1/1.
“In other words, we no longer witness a rising tide that lifts all boats, but rather, targeted price increases limited to policies and regions that were affected by losses without any spillover effect to other lines of business or regions,” says S&P.
Highlighting this, S&P states that the global Guy Carpenter Property Catastrophe Rate on Line index was up by just 1.1% on January 1st 2019, compared with a 5.3% increase a year earlier.
Despite the negativity, the ratings agency does highlight that terms and conditions held steady in general, while ceding commissions on pro rata business improved slightly.
Looking forward, S&P warns of the potential for further underwriting challenges for the reinsurance market.
“The reinsurance market is mostly global in nature and the U.S. property catastrophe market has been profitable for many years, with the exception of the past two years, and has subsidized other underperforming lines of business and regions for years.
“In other words, if other regions and lines of business don’t pick up the slack, the reinsurance sector’s underwriting margins and overall profitability will suffer and reinsurers will find it increasingly difficult to earn their cost of capital,” warns S&P.
