Friday, March 23, 2018

Reinsurance softening accelerates

There is still no end in sight to the softening in the reinsurance market. Despite some predictions that the current price cycle would start to bottom out this year, the opposite actually happened at the latest renewals on June 1.

One measure of reinsurance rates published by JLT Re showed average price falls of 5.1% this month ahead of the hurricane season in Florida, compared to 3.1% at this time last year, driven by continued excess capacity and strong competition among traditional and insurance-linked securities (ILS) markets. Some sought-after cedents achieved as much as a 10% reduction.

At the end of the first quarter of 2017, JLT Re estimated that dedicated reinsurance sector capital once again reached record levels, rising to US$325 billion from US$321 billion at the end of 2016, while premiums totalled US$255 billion.

Faced with so much supply, pricing has only one direction to go in, almost regardless of all other market conditions. Indeed, this result now marks the sixth consecutive year of falling reinsurance rates for June 1 renewals, with no end in sight.

“Despite elevated loss experiences, reserving volatility, inflationary and interest rate concerns and declining reinsurer returns manifesting so far this year, excess sector capital continues to drive the market,” said David Flandro, global head of analytics at JLT Re. “Surplus capacity is enabling cedents to negotiate discounts to expiring reinsurance rates.”

Other mid-year renewals are expected to produce similar discounts, and the cycle could now easily extend to January 2018, particularly if the prolonged period of benign losses continues through the US storm season. Hurricane Matthew last year came close, but the reality is that no major hurricane has made landfall in Florida or the US since Wilma in 2005.

Indeed, some forecasts now indicate the 2017 North Atlantic hurricane season could see above-average activity.

“The return time of an 11-year stretch without a major hurricane landfall across the US coastline is in excess of 300 years, reminding us that such good fortune cannot go on forever,” said Ed Hochberg, chief executive of JLT Re in North America. “After six consecutive years of falling pricing, reinsurance currently offers an extremely efficient form of capital. Carriers with the foresight to utilise today’s cost-effective reinsurance can help secure future profitability by preparing for the next market-changing event.”

The effect of this excess capacity in the US has led traditional reinsurers to discount pricing in Asia in a bid to maintain market share and ensure geographical diversification in their books. While this has helped to keep the alternative sources of capital out of the region, it is not clear how sustainable such pricing will be in the face of yet further reductions in the US.

Many people within the traditional reinsurance industry take the cyclical view that a significant loss or series of losses will scare away much of this alternative capital, allowing them to hike pricing and get paid on those claims. But there is an increasing sentiment that this market is here to stay, that big losses will be digested and that reinsurers simply need to adjust their practices to the new reality, which may mean taking a much more sophisticated approach to pricing risk.

It remains to be seen which view is correct, but the scales are tipping in favour of the latter. If so, that could mean an end to discounted pricing in Asia.


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