Friday, April 20, 2018

An end to rate reductions?

While 2017 was one of the worst years ever for global catastrophe losses, Asia experienced a relatively benign year. Even so, the continual rate reductions of recent years are likely to come to an end in 2018.

The hurricanes in the US, combined with earthquakes in Mexico, are reckoned to have caused roughly US$100 billion in losses for the insurance industry. Losses of similar magnitude were recorded in 2011, when the Tohoku earthquake struck off the coast of Japan and floods ravaged Thailand, and 2005, when Hurricane Katrina devastated New Orleans, and Rita and Wilma added further damage.

Both those previous examples caused rates to rise, but predominantly only in the loss-producing markets. Katrina prompted the last big rate rise in the US market, leading to a spike of more than 65%, while rates in Asia rose almost 50% between 2010 and 2012.

The aftermath of 2017 losses will probably look more like 2005 than 2011, with insurance buyers in the US facing tougher conditions.

North American rates were already solid before the natural catastrophe losses of 2017, according to Steve Tunstall, director of Tunstall Associates and general secretary of the Pan Asia Risk & Insurance Management Association.

“Harvey, Irma, Maria and company will accelerate the hardening market in North America and likely London too,” he says. “Asia is more of a mixed bag, with a multitude of regional players who have been largely unaffected by these events. There will be implications though, particularly for Asian customers who have a built-in expectation of year-on-year, double-digit discounts.”

This is echoed by reinsurers in the region, who say that customers are coming round to the idea that rates have bottomed out.

“We’ve certainly seen an end to unjustified rate reductions in our portfolio,” says Chris Kershaw, managing director of global markets at Peak Re. “By mid-December I’d say we have seen market behaviour in Asia Pacific that I’d characterise as mature, in the main “So long as reinsurer expectations have been sensible, client response has been sympathetic. Running a client-centred business model we see evidence that, while we understand our clients, clients see our position as constructive for the longer term.”

Of course, this is not universally true and expectations of further rate cuts are likely to be entertained by some players, but Kershaw says that this is a minority.

“There are some markets out there that seem to be offering softer terms, but by and large traditional leaders are maintaining a robust position with regard to risk-adjusted pricing,” he says. “This has to be seen as positive in helping take steps to return to improved profitability.”

The industry could certainly do with such a boost given the combination of factors weighing on profitability globally. Even before the losses this year, intense competition, abundant alternative capital and low investment yields were contributing to a negative outlook for the reinsurance sector by rating agencies.

It remains to be seen if profitability will improve in 2018. The continued presence of excess capital in the market and the absence of an even costlier event, such as a direct hurricane landfall in Miami, which Irma avoided, leads to less certainty over more widespread rate rises, according to Fitch.

But insurance buyers should certainly be aware that the soft market may have come to an end.

“Risk managers who are not mentally prepared and positioned to have robust discussions with both their markets and their internal finance teams could be in for an unpleasant year,” concludes Tunstall.

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