Equity analysts Morgan Stanley believe a meaningful upturn in reinsurance pricing is now remote with the market not likely to turn in the event of a large loss (~$50bn+).
Morgan Stanley said a combination of reserve deterioration, large catastrophes, and unmodeled losses were needed for material changes to prices in the global reinsurance market.
Catastrophe losses came near historical levels and some reinsurers took reserve charges in 2016, but with a surplus of capital looking to invest in reinsurance, these were not enough to significantly impact pricing.
Some pressure on investment income was relieved by higher interest rates, but increased interest could also bring higher inflation expectations, which is problematic for reserving adequacy.
In the January renewals there were some signs of pricing stabilisation, but these were on the lower end.
Reinsurance broker JLT Re said global property catastrophe reinsurance pricing was down 5.7% at the Jan 1 renewals, a slowing in the rate of decline compared to -8% one year ago, notes Morgan Stanley.
With diminishing returns for traditional reinsurers, slower growth in alternative reinsurance capital, and incremental demand stabilising the market, Morgan Stanley estimated pricing to be down by 0% – 5% at 1/1 2017. The analysts said that initial commentary suggests that global property cat pricing was down by 6% at the Jan 1st renewals, so just below the low end of its expectation.
Furthermore, the equity analysts estimate that every 5% pricing decline could impact return on equity (ROE) by up to 2 percentage points.
In the January renewals, the casualty market benefitted from some stabilisation in the primary markets while avoiding intense competition from alternative capital. Rates for casualty were flat to moderately down, with specialty lines hit with more substantial rate reductions, explained Morgan Stanley, citing brokerage JLT Re.
The reinsurance broker also highlighted that growing reserve volatility and some charges taken throughout the year contributed to the pricing stabilisation.
