Reinsurers Maintain Upward Pricing Momentum-But Will It Last?

October 24, 2019 by

Positive pricing momentum—it’s the favorite phrase of many reinsurance executives, who are hoping that the momentum they’ve seen in 2019 will continue during the coming January renewals and beyond.

The question is whether they will be disappointed, once again. Over the past few years, when reinsurers gathered at Rendez-Vous de Septembre—the official start of the renewal season—they started the meeting being bullish about rates but ended their discussions dejected. However, it looks like there is reason for reinsurers to cheer this year.

During the September 2019 RVS meeting, practitioners and observers agreed that it’s a firming market but not a hard one.

While the competitive headwinds are still there—namely excess capital and fierce competition—there are other pressures that are pushing prices upward from both ends of the value chain, primary and retrocessional.

Many reinsurers attending the RVS stressed that upward pricing momentum is necessary because they need to charge the right premiums for the risks they are assuming. It’s a matter of long-term stability.

Here, Carrier Management provides a roundup of the market viewpoints from AM Best, Aspen Re, Fitch, Hannover Re, IGI, Korean Re, Moody’s, SCOR and Swiss Re, in no particular order.

“Pricing for reinsurance and for commercial insurance broadly turned negative around 2012 and had been trending down until we got the big hurricanes in 2017 when [rates] flattened out,” despite the fact that the industry saw the largest insured loss year in history, said Brandan Holmes, vice president and senior credit officer, EMEA Insurance, at Moody’s Investors Service.

“A lot of reinsurers were quite disappointed because they expected greater firming of rates in response to the losses they’d taken,” he said during a meeting held recently by Litmus to discuss the key takeaways from the 2019 RVS. (Litmus helps the insurance and reinsurance sector better understand ratings and rating agencies.)

When 2018 brought another big cat year, creating the fourth-largest insured loss year, prices started responding a bit more, he said. “Yes, pricing is getting better, but it’s still not at technical levels for a lot of lines. On average, pricing is still on average 20 percent lower than it was in 2012 when prices started going down. The picture is better and it’s improving, but it’s by no means a hard market,” Holmes emphasized.

Holmes explained how we got here. First, he said, primary carriers, which have experienced losses, are driving some of the market tightening by raising rates and pulling back on capacity.

A lot of the big commercial insurers have pulled quite a lot of capacity out of the market, such as Lloyd’s, AIG and FM Global. That’s caused primary prices to start rising quite significantly and has benefited the reinsurers on their quota share business.”

Another trend driving price increases is coming at the other end of the value chain—in the retrocessional market. “Many reinsurers have been keeping their gross catastrophe exposure quite high but buying down the net exposure using retro,” Holmes explained.

A lot of alternative capital investors are providing capacity in the retro market, which has helped reinsurers through these large cat events “because a lot of that loss was put into the retro market and onto alternative capital investors,” he said, noting that this is one reason reinsurers’ balance sheets stayed strong through these two large loss years in 2017 and 2018.

Some of the newer capital market investors were apparently surprised by the extent of the losses and did not have a number of profitable years to help them absorb the losses, he continued. So, some retro capacity came out of the market in the January 2019 renewals or pricing went up quite strongly, he said. These prices hikes affected reinsurance pricing “because a lot of reinsurers are reliant on retro.”

Holmes said that casualty prices are being pushed up by low interest rates and increased claims frequency and severity. Casualty underwriters can no longer rely on investment income to offset soft prices.

“There’s been a lot of commentary in the press around price increases, but they haven’t actually been real price increases. They’ve just been keeping the pace, generally, with the increase in loss costs,” said Christian Dunleavy, chief underwriting officer, Aspen Re.

“They haven’t really materialized into margin increases in a material way for the industry, which is what really has to happen, because there are just too many sectors or too many segments of the market where pricing has been on a downward trajectory for a long time and is below where it needs to be,” he said during a panel discussion held by S&P Global Ratings at the RVS.

“So, we expect it to continue to increase, but it will take time. It’s more of an organic change. It’s not an event-driven change, so it’s going to take a little longer to flow through the industry. But we think that makes it much more sustainable,” Dunleavy said.

“There’s just not enough margin, particularly for the volatility that’s being transferred. [T]he industry talks a lot about bank and payback. I hate both of those terms. Frankly, we need to be paid for the volatility that we’re assuming on our balance sheets,” he emphasized.

“I actually think we need to talk less about the market and we just need to talk about the price adequacy of individual transactions and classes in the business,” Dunleavy continued.

Markus A. Eugster, chief executive officer of Korean Re, who also spoke on the S&P panel, said every company needs to have their own view on where they’ll walk away from the table. “Changes are visible and prices are correcting.”

Currently, the industry faces “a number of macroeconomic uncertainties. So, we might face a situation where we’ll have hits on both asset and liability sides. That’s why I think our pricing needs to go up.”

“The last couple of years show that the way the market has been behaving for a long period is simply unsustainable. There’s too much pain in the markets,” said Waleed Jabsheh, president of International General Insurance (IGI).

IGI is predominantly a facultative reinsurer, and Jabsheh said the upward pricing momentum varies by class and geography. “Certain classes, especially the ones that have been hit hardest, are the ones seeing the most dramatic increases.”

While it’s still early days, he said, IGI expects that momentum to continue into 2020.

Jabsheh noted that reinsurance pricing has become more regionalized than it was 10-15 years ago. So, the upward pricing momentum isn’t the same globally. “London, Bermuda and the U.S. are seeing much stronger and healthier shifts” than in regions like Asia and the Middle East and Africa. Nevertheless, he added, all markets will tend to shift the same way directionally. “At the end of the day, it’s still a global market. Companies should and ultimately will have to filter their strategies through to all their territories.”

The key to success, he said, is to understand the differences. Holding a pen in his hand, he said: “The price of insuring this pen in the U.S. is different than the price of insuring this pen in the Middle East. You cannot take a broad brush across all parts of the world. There has to be different strategies for different territories, different classes. Understanding the underlying characteristics of each market is critical. That is where sometimes [companies] can get it wrong.”

Laurent Rousseau, deputy CEO of SCOR Global P&C, said he expects continued market firming in 2020 so that the company is able to reinsure its business profitably–a principal talking point for brokers and clients during the renewal season.

Rousseau stated that specialty areas like marine, aviation and engineering need price increases in 2020 to offset significant losses over the past few years. “This is the story across most lines of business,” he said. The price firming in 2019 was useful, “but further price increases are necessary to put us back to a level that’s sustainable,” he emphasized during a press briefing at the RVS.

SCOR saw a number of lines of business and markets where price increases were achieved in 2019 driven by either large losses affecting the market or continued soft pricing, he said, noting that where profitability has been achieved, prices are more or less stable.

“On casualty, if we see significant price increases in the U.S., the question always remains: Is that enough? I think the answer is: The casualty market in the U.S. is not one market; it’s maybe 20 different markets,” he said. “So the answer is: in some segments, no, and in other segments, yes. It’s really up to our underwriting team to pick and choose the areas that have sufficient profitability and the other ones that don’t.”

Jean-Jacques Henchoz, chairman of the executive board of Hannover Re, said during a press briefing that reinsurance prices worldwide are going in the right direction. “To some extent, we still feel there’s a way to go, particularly in the United States. I believe that pricing should continue to improve to make sure we receive adequate compensation for the very significant exposure we take on board,” he added.

At the same time, the primary industry needs to charge adequate prices to be able to absorb the risks. “It’s a combined effort from the primary and reinsurance sector,” Henchoz said.

The key message, he added, is that for this year and next, Hannover Re will have improved conditions going into the January renewals, continuing to emphasize price adequacy and bottom-line results before premium growth.

While it is still a difficult market in which to find organic growth, Hannover Re still sees new business opportunities in a number of regions, such as the Asian markets, particularly in China, Henchoz confirmed.

Hannover Re is quite positive on the North American business because primary carriers have reacted with price increases over the past few quarters, said Michael Pickel, member of the executive board in charge of the North American, South American business and German-speaking markets in P/C reinsurance. “The rate momentum is in favor of insurance carriers, and for the reinsurers as well because we’ve improved our ceding terms.”

Pickel emphasized that Hannover Re is picking and choosing opportunities carefully, avoiding some areas where rates haven’t improved sufficiently such as workers compensation. On the other hand, the reinsurer is taking on some excess casualty business and financial lines business, where the industry has experienced losses but where Hannover has not suffered the losses. “This gives us opportunities to increase our presence there,” he said.

In addition, the company is seeing some momentum in the per risk property line of business, which also is creating opportunities, Pickel continued.

During a Swiss Re press conference, Edouard Schmid, chairman of Swiss Re Institute and group chief underwriting officer, expressed concern about U.S. liability business.

On the one hand, there has been significant rate deterioration over many years in this segment, “so the price quality has lowered a lot,” said Schmid. At the same time, he added, there has been a significant escalation in jury awards for bodily injury against large corporations over the past few years. Just looking at the 50 largest verdicts between 2014 and 2018, the median of verdicts has almost doubled, he said. That’s why Swiss Re has put these portfolio decisions on a so-called “risk priority” to understand what is happening, he explained.

For example, Swiss Re is monitoring the trend of litigation funding, where investors buy litigation rights to get as much money out of the courts as possible, Schmid said.

Swiss Re is also using data analytics to better understand the large corporate exposure in its portfolio and in its clients’ portfolios. The result of the analysis: For large corporates, “we don’t really see that rate increases are sufficient to bring this kind of business to a sustainable level with that kind of litigious environment in the United States.”

In a presentation to the market at the RVS, Robert DeRose, senior director, Global Reinsurance Ratings, AM Best, said the reinsurance market continues to face headwinds in the areas of intense competition and excess capacity. Excess capacity “is still very, very much on our radar, and while we’re seeing some improvement,…we still think that is a major threat to the long-term sustainability of the improvement that we’re seeing today.”

There’s going to be more transparency and more pressure on calendar-year performance, “which should help drive better underwriting discipline going forward,” said DeRose, attributing this to the soft market pricing of the past several years and diminishing levels of favorable prior-year loss reserve development.

He also said that the industry is getting some tailwinds via the increased alignment between the traditional and alternative market, or third-party capital. “That’s something that has been happening for the past few years.”

“Alternative capital appears to be more disciplined [than in the past]. That should bear well for pricing over the near term,” he said separately on a pre-RVS webcast.

Alternative capital has reduced some capacity after losses in 2017 and 2018 and as a result of experiencing some trapped collateral, which is testing the commitment of newer participants in the retrocessional market, DeRose said at RVS. (“Trapped collateral” can occur when a cedent does not know the full extent of its losses and thus has to wait to allow those losses to be fully settled). At year-end 2018, about 20 percent of alternative collateral was trapped, which is less of a problem for capital providers with long-term experience and profits in the reinsurance market.

So, what have the past two years really taught third-party capital? Answering his own question, DeRose said, “The most evident or the most interesting story to be learned is that catastrophe losses do have a tail.”

Third-party capital has been interested in the property cat space because it provided an aspect of diversification for them and the models were pretty good. “They thought they had a good idea of the risk.” However, Hurricane Irma showed both non-traditional and traditional players that there was a reserve tail generated by the assignment of the benefits issue in Florida, which “caught a lot of people by surprise.”

(Editor’s Note: AOB, is a document signed by a policyholder that allows a third party, such as a water extraction company, a roofer or a plumber, to “stand in the shoes” of the insured and seek direct payment from the insurance company. In the wake of Irma, some contractors misused AOB to file inflated claims and then pursue lawsuits against insurers when the claims were disputed or denied.)

Brian Schneider, senior director of Insurance Ratings for Fitch Ratings, said the uptick in retrocessional rates, prompted by losses seen by capital market investors in 2017 and 2018, could put a squeeze on reinsurers.

“Reinsurers have been buying a lot of retro, and the retro rates are going up even more than reinsurance rates. They could be a bit squeezed in the middle because they’re not getting as much increase as the primary insurers are getting, but they might have to pay more on the retro side.”

Schneider said he didn’t think the capital market capacity providers in the insurance-linked securities (ILS) sector would stay away for long—if they do stay away. Reinsurance represents a relatively small part of their overall portfolios, and they’re likely to continue to enthusiastically provide capital. “They’re fairly diversified in other sectors outside the insurance space,” he said in an interview at the RVS.

While they may have lost more money in the insurance space than they would have expected, over time they’ll get more comfortable with the potential that there is loss creep, which occurred in 2018 from Typhoon Jebi, due in large part to late reporting of claims by Japanese insurers, he said.

Capital investors understand the models, they know there is a potential for losses and they know that models do a decent job, particularly with wind and hurricane, he said. However, they’ve had to reassess the risk and pricing with the loss creep that’s occurred and perils they didn’t expect to come through, such as the magnitude of wildfire risk. “It’s the things they haven’t modeled for which cause them pause. If these can be corrected and better understood going forward, then investors will be confident enough to go back in because the ILS market provides them with better yields.”

S&P Global Ratings discussed the fact that reinsurance pricing was gaining momentum in its “Global Reinsurance Highlights, 2019 Edition,” which said: “After modest reinsurance rate increases at the start of 2019, characterized by the regionalization of reinsurance pricing, the positive trends picked up steam throughout the year, with larger rate increases during midyear renewals with tightening terms and conditions.”

“We expect this momentum to continue, signaling a move toward desired risk-adjusted pricing,” S&P added. “However, we don’t characterize the current pricing environment as a hard market but a firming one, with expected global aggregate rate increases up to mid-single digits over the next 12 months, assuming an average catastrophe year.”

While S&P didn’t consider reinsurance pricing as having entered a hard market, it did term the increase in primary rates as a hard market, especially in U.S. excess and surplus lines, helped by underwriting actions by Lloyd’s insurers and AIG, among others.

Retrocessional covers will continue to get “significant rate increases in the double digits,” the report predicted.

This article first was published in Insurance Journal’s sister publication, Carrier Management, in the September/October 2019 printed edition. It also appeared online in CM on Oct. 21, 2019.

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