Downward drift of cat pricing set to resume at 1.1

Catastrophe reinsurance rates are likely to move back into negative territory at 1 January as market fundamentals bring about a reversal of the limited pricing gains made in 2018.

As the reinsurance market begins the run-up to the 1 January renewal season at the Monte Carlo Rendez-Vous, a range of reinsurers and brokers suggested privately that without a major cat loss, the balance of power would be tilted in favour of buyers.

The US casualty market is less strictly governed by supply-and-demand economics, so may be subject to a different set of dynamics that could again prompt an uneven improvement in terms for reinsurers.

Reinsurers, which tend to dominate the public discourse on rates in Monte Carlo, are likely to talk up rates, or at least to argue for a flattish renewal.

Last week, as part of its response to the takeover approach from Covea, Scor said it was bullish on rates and talked about the start of a new pricing cycle.

However, at least in cat lines, there is too much capital chasing insufficient risk. Specialty lines like marine and aviation are showing evidence of distress at the front end with a number of carrier withdrawals, but the much smaller secondary markets are also likely to continue to be over-capitalised given the diversification benefits they offer.

As such, it looks likely that we will see a continuation of the recent pattern in which there has been a divergence between the pricing commentary from reinsurers at Monaco and the final outcome at 1 January.

With absolute returns therefore set to remain disappointing, much attention at the conference is likely to focus on reinsurers’ responses.

Here discussions will focus on M&A, diversification, cost-cutting and technology.

Cat pricing

Property cat reinsurers achieved mid-single-digit rate increases on loss-free US accounts at 1 January this year and there was an almost imperceptible increase in international cat pricing as well.

This probably represented a positive swing of 5-10 percentage points from the trend before hurricanes Harvey, Irma and Maria (HIM) hit.

The 1 January renewals were widely described as “disappointing” by reinsurers, but were probably not much worse than most private assumptions from observers that anticipated a rapid reload by the ILS market.

Momentum on property cat pricing slowed over the next nine months as the replenished ILS capital was brought to bear and loss creep turned out to be largely confined to Hurricane Irma.

The 1 April Japanese renewals were almost exactly flat and the 1 June renewals – which included a high proportion of loss-hit accounts – were little better.

Underwriting sources said the renewals were “depressing”, with even loss-impacted accounts attracting only single-digit rises and isolated examples of “good cedants” that were able to get loss-hit covers home with small risk-adjusted reductions.

The loss record has provided little help to reinsurers arguing for rate rises, with the first half of the year extremely benign. Swiss Re estimated global cat losses at $18bn in H1 compared to a 10-year average of $30bn.

And to date the North Atlantic wind season – which is predicted to be below average in meteorological terms – has resulted in no meaningful events.

As such, reinsurers that have avoided loss creep have reported strong results.

In reinsurance, capital is king – and the oversupply of capital remains the sector’s single biggest challenge.

According to data from Willis Re’s global index, reinsurers’ shareholders’ equity stood at $364.9bn at H1 2018, up 4.8 percent from the same point a year ago.

ILS capital, which is typically willing to accept a lower return than public markets equity capital, has also recovered to reach record levels and has a disproportionate impact in the cat market.

The industry’s top 10 managers grew their assets by 7.2 percent over the first half of the year to reach $68.7bn at 1 July, according to figures from sister title Trading Risk. This is 21.2 percent higher than at the same point last year.

That ocean of capital is unlikely to dry up any time soon, and it looks as if it could get deeper still, with a series of takeovers by businesses with huge balance sheets likely to create additional capacity over the next two to three years.

AIG has already completed its $5.6bn acquisition of Validus, Axa is awaiting the close of its $15.3bn XL deal and The Hartford has recently signed a $2.1bn agreement to take over Navigators.

Taken together, the three acquiring businesses had 2017 shareholder equity of $165bn. Any or all of them could put more capital into the reinsurance operations of their new acquisitions over the next few years, potentially increasing capital oversupply even further.

On the fringes of the global picture, Lloyd’s sharp focus on improving profitability could place some pressure on the amount of aggregate limit it deploys, although it is likely to have a more pronounced effect in primary lines.

There is also an unintended consequence of creating confusion around both buying and selling, with syndicates unclear at this stage what their business plans for 2019 will look like after Lloyd’s is finished with them.


There has been additional demand coming off the back of 2017, with various cedants looking to add more catastrophe limit, but this has tended to be low rate-on-line top-layer risk transfer.

In broad terms, sources expected demand for reinsurance cover to be flat to modestly up.

Sources said this simple supply and demand ratio made rate rises more or less impossible, at least on loss-free accounts.

Absent what one source described as an “Armageddon event”, reinsurers’ hopes seem to be pinned on a lock-up of the retro market.

Markel Catco, the cornerstone provider of low-attaching retro, has been a huge outlier on loss deterioration, having initially forecast a 2017 return of 5 percent up to 15 percent down following the HIM storms before revising its loss to 27.6 percent in April this year. In May this deteriorated further to 41.4 percent.

The company announced a successful mid-year fundraise of $600mn, but if it were to suffer significant redemptions or some other adverse outcome as a result of the post-raise deterioration, then a meaningful reduction in renewal capacity could cause some dislocation in the retro market.

With available capital again dwarfing supply, the extent of rate rises will depend in part on where cedants choose to place themselves on the spectrum of relationship-based buyer to financially driven buyer.

Reinsurers are sure to argue that a period of respite on rates is required after years of steep reductions and with cat pricing still roughly 40 percent below 2012 levels.

Regardless, a canvass suggests that risk-adjusted rate reductions of around 5 percent could be achievable for many US cedants.

European cat pricing is unlikely to give up as much ground as US cover due to lower margins and the very muted uptick in rates last year.

Asia has historically been the softest region for pricing as reinsurers chase growth.

Casualty treaty

The casualty market is likely to behave somewhat differently, sources suggested.

Cat books can still deliver returns in the mid-to-high single digits in a normal loss year, but even with investment returns baked in, casualty treaty is offering returns that are more meagre.

Auto, in particular commercial auto, has been highly challenging and the loss inflation seen there for a number of years has started to spread to other areas.

Rising loss ratios coming off the back of years of increasing ceding commissions pushed reinsurers to breaking point last year, with terms starting to move against cedants in the second half of 2017.

Returns are still considered inadequate and it seems likely that there will again be some reduction in ceding commissions at 1 January, with original rates also offering reinsurers an offset against loss inflation.

With pricing in casualty more heavily driven by loss experience, the spread of pricing outcomes is likely to be wider than in cat, where most clients will come into the renewal season without losses.

Back to the grind

Although it is early in the renewal season and major cat events cannot be foreseen, the dynamics of the developing discussions are clear already.

And after the turbulence and excitement of 2017, it seems possible that the long slow grind that characterised the market in 2015 and 2016 will resume.

If that proves to be the case and the market as a whole cannot fight its way back to healthy returns, the focus will shift to the performance and strategy of individual businesses – and who is a buyer and who is a seller.