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Don’t expect reinsurers to come to the rescue

Posted July 20, 2017

David Worsfold

Underwriters, brokers and buyers will already be filling up their diaries ready for the reinsurance market’s annual Rendez-Vous in Monte Carlo in September. The frantic whirl of meetings, lunches and dinners traditionally sets the tone for the crucial end-of-year renewal season. Investment teams casting envious glances at their underwriting and reinsurer colleagues as they make plans to head off to the south of France will be hoping they come back with news that all the talk is of firming rates, which might bring welcome relief from the relentless pressure for better returns on capital.

They are likely to be disappointed.

The soft pricing in the global reinsurance market will continue for at least the rest of 2017 and into 2018, according the ratings agencies.

They expect premium rates to continue declining, due to large volumes of under-deployed capital and sluggish demand from reinsurance buyers following several years of below-average catastrophe claims.

Even if the cost of major losses returned to historical averages, prices would be unlikely to rise much as there is too much capital in the sector. Catastrophe losses actually rose in 2016 to their highest level since 2012 but were still only marginally above the 10-year (2006-15) inflation-adjusted average. This is casting a long shadow across the reinsurance market, according to Fitch Ratings.

“We expect declining premium rates and investment yields to weaken profitability, reflected in our negative outlook for the sector. We forecast the sector’s combined ratio to deteriorate to 92.0% in 2017 from 91.5% in 2016.”

It is not hard to see why it will take an exceptional run of catastrophes to turn the market as the flood of capital shows little sign of abating, growing to a record US$81bn in 2016 from $72bn in 2015.

According to a recent Aon Benfield report, alternative capital which has been attracted to the market despite tightening margins, grew by 12.5% in 2016. This actually came in below the 10-year compound annual growth rate (CAGR) of 16.9% but still represents a lot of new money looking to cherry pick its way through the most attractive reinsurance portfolios. Traditional capital grew at a more modest 3.4% 10-year CAGR to $514bn in 2016.

global-reinsurance-capital-traditional-alternative-sources-chart-research

Source: Aon Securities, Insurance Investment Exchange calculations

S&P Global Ratings takes a similar view: “While global reinsurance premium rates are softening at a decreasing rate, the ‘softer for longer’ pricing environment is proving to be deeper and longer-lasting than many market participants anticipated”.

Panellists at the agency’s recent 33rd Annual Insurance Conference said they were repositioning their businesses to maintain relevancy and profitability in the face of the deep and protracted soft pricing cycle, a raft of emerging risks and regulations, and the continuing influx of alternative capital.

“I believe right now the reinsurance industry is repositioning itself,” Albert Benchimol, President and CEO, AXIS Capital Holdings told the audience: “We have an opportunity to reinvent ourselves but stay with the core value of helping people. At the end of the day, this is an interesting time in the industry because we are going to significantly add to the value proposition. We could have lower pricing and still make more money.”

That will not be good news for primary general insurers and their investment departments as it means they cannot look to the reinsurance market to help push up premium rates. If reinsurance can be bought so competitively, then no-one will want to risk stepping out of line with increased rates, especially with the added pressure some will be facing from new entrants to their markets.

The one major exception to this seems to be the UK motor insurance market which is still reeling from the government’s shock decision to slash the discount rate for large personal injury settlements from 2.5% to -0.75%. This is being reviewed but 1% seems to be the best most in the industry believe they can hope for. If this comes through early enough in the autumn, it may persuade reinsurers to back off from the increases suggested by the 1 July renewals that have just gone through. No firm figures are available yet but all the market talk is of increases.

The problem insurers face is that passing those increases on to customers has become a political issue so they have very little scope for improving margins.

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