MONTE CARLO, Monaco — The upward trend in reinsurance pricing that began last year looks set to continue during the year-end renewal season as primary insurance prices increase and reinsurers seek to push rates higher following two years of significant catastrophe losses.
While rate increases will vary greatly by line and by account, depending on past losses and catastrophe exposures, insurers’ reinsurance costs will rise moderately on average during Jan. 1, 2020, renewals, barring major catastrophe losses over the next few months, experts say.
In addition, lower interest rates will suppress investment income and drive reinsurers to focus on achieving underwriting profits, they say.
Reinsurers, cedents and brokers met last month at the Rendez-Vous de Septembre in Monte Carlo, Monaco, which traditionally marks the beginning of the year-end renewal negotiations. Market participants meet in the tiny principality by the Mediterranean each year and participate in dozens of small private meetings to discuss market conditions and individual programs.
Meeting shortly after Hurricane Dorian devastated parts of the Bahamas but caused relatively little damage in the United States, reinsurers, brokers and others all said they expect increases on Jan. 1, compounding increases pushed through at the beginning of 2019 and during April and mid-year renewals for Japanese and Florida-based insurers.
“It’s a market in transition, it’s a correcting market and it’s a market that is responding to real losses over the past two to three years and changing loss trends,” said Albert Benchimol, president and CEO of Bermuda-based insurer and reinsurer Axis Capital Holdings Ltd.
But increases will vary by line and there is still a lot of reinsurance capacity available in the market, he said.
Property catastrophe risks, U.S. casualty, commercial directors and officers liability and areas of marine and aviation all need more rate increases, Mr. Benchimol said.
“It’s an underwriter’s market, it’s one where you’ve got to respond to the risk and to the opportunity,” he said.
The increases in rates, which began last year, are continuing despite the first half of 2019 being “very benign” for catastrophe losses, said Graham Coutts, a director at Fitch Ratings Ltd. in London.
On average, reinsurance rates increased in the low single digits in January 2019 and a similar level of increases will likely be pushed through in January 2020, although there will likely be significant variations with some accounts seeing doubledigit increases and other accounts seeing decreases, he said.
On the primary side, “we see big change in pockets of the (excess and surplus lines) business,” said Chris Bonard, CEO of Ed Broking (Bermuda) Ltd. “Certain types of U.S. property business is seeing very significant rate increases and publicly traded directors and officer liability is seeing significant increases, too.”
For reinsurers, catastrophe rates are increasing but “we are not seeing a knee-jerk change in price, we are seeing certain tranches and segments changing,” he said.
“2018 was an inflection point in the pricing environment,” said Edi Schmid, group chief underwriting officer of Swiss Re Ltd. in Zurich.
But the rate increases that began last year followed many years of significant rate declines, he said.
“Prices have adjusted to some extent, but we still feel there’s a way to go, particularly in the United States,” said Jean-Jacques Henchoz, chairman of the executive board of Hannover Re SE.
For the remainder of 2019 and 2020, reinsurance renewal prices will likely increase, he said.
Munich Reinsurance Co. expects moderate growth in overall primary and reinsurance premiums over the next several years, said Torsten Jeworrek, chairman of the reinsurer’s reinsurance committee based in Munich. In North America, compound annual growth rates – excluding inflation – are expected to be 2% for both primary and reinsurance business from 2019 to 2021, he said.
“What we have seen in reinsurance is worldwide stabilization in rates. We have not seen hardly any market or line of business where rates deteriorated in the past 12 months,” Mr. Jeworrek said.
In Japan, the Caribbean and some areas of the U.S., rates have increased significantly, “which is a direct response to the very significant cat events that our industry suffered last year and the few years before,” he said.
According to Swiss Reinsurance Co., worldwide insured disaster losses totaled $85 billion in 2018 and $150 billion in 2017.
AIR Worldwide, however, estimates that average annual losses from catastrophes worldwide is about $92 billion, said Bill Churney, president of the Boston-based catastrophe modeling firm.
“So even though last year was fairly severe, we’d say it was a slightly below average year,” he said.
Primary rates have also increased, particularly in the United States and global specialty lines such as marine and aviation, Mr. Jeworrek said. “My expectation is that we will see further stabilization and price increases in reinsurance, and we will also see the ongoing trend on the primary side.”
Increases in primary insurance lines benefits reinsurers “given that most of them are now actively involved in that space and they also participate via proportional covers,” said Mike Van Slooten, head of market analysis at Aon PLC in London.
The reinsurance sector remains well-capitalized despite the 2017 and 2018 losses and there should be “ample capacity” for reinsurance buyers at year-end, he said.
The market is also seeing an increased demand for reinsurance, said Mark Hvidsten, deputy chairman of Willis Re in New York.
“There’s a more systemic demand for reinsurance manifesting itself and I think it boils down to people are reminding themselves of the value of reinsurance in protecting (profits) as opposed to just focusing on the capital efficiency,” he said.
While some of the increased demand is cyclical, “companies are much more aware of the importance of managing volatility of earnings,” Mr. Hvidsten said.
While property reinsurance increases are being driven in part by catastrophe losses, low interest rates are driving casualty reinsurance rate increases as reinsurers seek to secure underwriting profits to offset lower investment returns, several observers said.
“Our expectation is that central bank rates will remain low, so investment yields remain low and that puts more pressure on the underwriting side,” said Mr. Coutts of Fitch.
With loss trends rising, as liability awards outpace inflation, and interest rates likely to remain low, reinsurers will have to rely on underwriting to provide returns to investors, said Mr. Schmid of Swiss Re.
“In this low interest rate environment, it’s very tough to actually generate the cost of capital in the (property/casualty) markets overall,” he said.
