With the reinsurance industry now having taken time to reflect on the catastrophe losses of the previous two years and re-evaluate where the baseline for rate adequacy lies, the opportunity has arrived for participants to work together and show pricing discipline.
This is according to Adam Szakmary, Director of Underwriting – Bermuda at Hiscox Re, who recently commented on the adequacy of rates in the market and the continuation of the reinsurance pricing cycle.
“Whatever happens, for the health of the market, a flattening of the risk-adjusted pricing cycle cannot remain in the long-term,” Szakmary explained.
“Client differentiation aside, even if the cycle is not as ‘peaky’ as it has been in years gone by, it needs a broader readjustment for the cycle to work; the areas under the peaks need to widen.”
Szakmary noted that reinsurance pricing stayed largely flat at the January 2019 renewals despite combined catastrophe and man-made insurance losses of around $230 billion in 2018/17.
Loss-affected accounts saw moderate pricing improvement, but areas unaffected by recent catastrophe losses face continued pressure, and in the U.S pricing continues to languish at close to half of 2006 levels.
He added that the market is also dealing with much uncertainty around reserving, risk severity, and loss development from less well-understood perils.
2018 losses were felt more heavily by the reinsurance market than in 2017, meaning ILS investors decided not to reload their capital allocations as much as was forecast.
However, less available capital has not immediately translated to pricing improvement, Szakmary explained.
“The opportunity to show discipline has arrived,” he said. “With losses outside of expectations, caution is in the air and, to this writer at least, caution smells like a re-evaluation of the insurance cycle as the market collectively changes where it thinks the baseline for rate adequacy lies, and therefore the margin needed for the market to successfully trade forward.”
“There are enough indicators to say the market cycle shouldn’t fail the industry,” Szakmary added. “To do that, the participants need to be patient, appreciate the wider factors at work, and act together.”
Further adding to the need for pricing adequacy is the volatile performance of the financial markets over the last year and the challenging investment environment, which delivered negative returns on all four major investment asset classes year-on-year in 2018.
“Underwriters must evolve from simply looking at their lines of business and take a careful look at the wider macro forces at work that will impact the behaviour of capital in the sector,” Szakmary remarked.
Factors like rising interest rates and inflation matter to capital coming into the sector via ILS investors, he said, who are looking at reinsurance as an alternative place to put their bet, he said.
If the risk-adjusted pricing and the uncertainty that’s in the insurance market right now doesn’t provide enough long term margin, then theoretically they should demand higher rates.