January Reinsurance Renewals Saw Hikes of Up to 5%, with More Expected: S&P

Global reinsurance pricing in aggregate was flat to up about 5 percent during the January 2018 renewals, and more price hikes can be expected in loss-affected areas during the year, according to S&P Global Ratings.

After last year’s spate of natural catastrophes with global insured losses of roughly $130 billion, the question S&P asked in a report published late last month is whether the pricing hikes seen during the January renewals will persist.

Last year’s insured losses “will likely wipe out the reinsurance sector’s 2017 annual earnings and erode the capital of certain reinsurers,” said S&P in its report titled, “Reinsurance Pricing Was Up At The January Renewals, But Will The Momentum Continue Or Fizzle Out?”

As a result, “reinsurers stuck to their underwriting discipline — helped by stable capacity and the difficulty in displacing existing reinsurers, as cedents showed some loyalty,” S&P’s report said. It noted that specific rate increases varied by line of business, whether the policy had experienced any losses, and by region.

“In terms of the spillover effect, outside of loss-affected lines and regions, the experience was somewhat mixed, but the sentiment in general had a slight positive bias, as reinsurers gave little away,” S&P said.

“We believe that without the cushion of earnings from [the] property catastrophe line, which benefited from the recent mild catastrophe years, reinsurers would have been unwilling to accommodate any further slippage in rates and terms and conditions.”

“We continue to maintain a stable outlook on the global reinsurance sector for the next 12 months and on the majority of the reinsurers we rate,” noted S&P Global Ratings Credit Analyst Taoufik Gharib. “In general, it seems that during the 2018 January renewal season, reinsurance pricing stopped its downward trajectory, reaching an inflection point in the underwriting cycle. Directionally, the trend is positive.”

Reinsurers are putting a positive spin on the January renewals because “rates are at least heading up or stabilizing with improving terms and conditions,” S&P said. This is a dramatic change from their sentiments expressed about last year’s first half.

Some Casualty Rates Inadequate

S&P noted that there were small to moderate rate increases in certain casualty lines, such as U.S. medical malpractice and professional liability.

The ceding commissions in these lines improved slightly — by 1-3 percentage points — and price increases were in flat-to-low single digits, with more in lines that experienced adverse loss/claims trends, S&P explained.

The report cautioned, however, that rates are still inadequate in certain casualty lines, such as general liability and directors and officers liability, “with deteriorating attritional loss ratios.”

What’s Ahead?

S&P predicted that rate increases will continue for the remainder of the year. Pointing to Florida and Puerto Rico, which are up for renewal in the first half of the year, S&P said that those markets are likely to experience “double-digit rate increases given the magnitude of the losses they suffered in 2017.”

S&P added: “rate increases by cedents in their primary lines will help the pro rata insurance, as will the rate increases on renewals of portions of multi-year programs (especially in loss-affected lines).”

There is plenty of traditional and alternative capital available, the report affirmed, which might hold back further rate increases during the next 12 months.

“However, the reinsurance sector pricing has found its nadir — at least for now,” S&P said.