Insider In Full: Late 1.1 renewal will extend U-shaped dynamic pricing
Early on in the 1 January reinsurance renewal the state of play remains uncertain, with contradictory messaging and sentiment across the market and a high degree of fluidity...
Nevertheless, the outlines of the renewal are starting to emerge, with sources reporting uneven positive momentum on rates based on early data points and a better picture for reinsurers in all areas than 12 months ago.
However, the U-shaped pricing curve that has been seen across reinsurance, primary and retro looks set to continue through the first quarter, with a squeeze for retro-reliant reinsurers poised to take hold once 2020 programmes are in place and primary pricing still accelerating.
Early indications suggest a somewhat late renewal, with rates firming modestly – albeit with a high degree of differentiation by geography, peril and client – as some capacity pulls back and social inflation takes a central role in negotiations.
Some reinsurers are disappointed with what they see as a lack of major rate movement – outside of the primary pricing that is driving improved returns for proportional writers – but others are notably upbeat.
Some of this tonal unevenness reflects optimism among many that reinsurance rating momentum is starting to accelerate, with major reserve charges and fully baked-in increases in retro costs set to drive increased gains through 2020.
This would replay previous market turns in which 1 January served as an inflection point, with worsening losses and higher capital costs then serving as an impetus for reinsurance rates to track higher sequentially at each renewal through the year.
Multiple broking sources acknowledged privately that rates would rise and that they were preparing their clients for that outcome to avoid any surprises.
Sources said it may also be harder to push rate rises at 1 January compared with 1 April and 1 June – when Japanese and Floridian business renews, respectively – with January focused on Europe and large US nationwide and global clients that have either better loss experience or more buying power.
There is an expectation of greater friction between reinsurers and cedants than in recent renewals as they seek to reach common ground on pricing.
Here are some highlights by line of business:
- European cat treaty: Risk-adjusted rates are flattish in the most advanced renewal, with some low single-digit increases and modest reductions, as cedants take advantage of the diversifying nature of the peril, the benign loss record and the cornerstone continental capacity.
- US cat treaty: Little business is firm ordered, but early indications suggest some uplift for even loss-free clients, although the best clients are escaping with broadly flat renewals, while loss-hit clients are set to pay substantially more.
- US casualty treaty: Ceding commissions are expected to broadly hold up as reinsurers rely on significant momentum from original rates, which will drive comfortably double-digit dollar growth, although excess-of-loss pricing could be up double digits to reflect increased severity. The assumption of reserve deterioration is widespread in renewal discussions, with some predicting major Q4 charges.
- Retro: The segment is “as hard as nails”, with aggregate and quota-share capacity less widely available, pricing spiking and capacity being targeted by providers on preferred clients. Further use of cat bond market for retro is likely after moves from Everest Re and Axa XL, and a number of quota-share vehicles are likely to be dismantled due to withdrawn ILS support.
- Specialty: Specialty lines tend to renew late, but Q4 aviation reinsurance renewals have shown double-digit rises, and there are expectations that other areas like marine could finally see some uplift, along with distressed pockets such as surety and downstream energy.
Early stages of the turn?
Despite the talk of the U-shaped curve phenomenon reaching a tipping point, and carriers achieving some degree of success in moving rates, the market remains somewhat pessimistic about how much ground will be gained by reinsurers at 1 January.
Mixed messages on property rates has been a theme, with loss-hit, cat-exposed accounts generally seeing rate increases and segmentation continuing to be the operative word.
One reinsurance executive said “it’s great that primary rates are up”, but that while reinsurance terms are not loosening, there is limited traction to date for improvements in terms.
“People are reacting to the positive underlying rate, but change in the reinsurance market is not happening just quite yet.”
Speaking generally about the market, the source noted “property cat’s not going down, but it’s also not going up”.
Addressing all lines of business generally, the same source said: “We’re in the early stages of a market turn. It's a little frustrating – I’m a little impatient – but we will grow when the time is right.”
Early signs suggest incremental gains on rates will be achieved, while client differentiation remains the norm.
Sources expect ceding commissions will remain at elevated levels for casualty, with reinsurers securing only modest - and highly targeted - reductions. This reflects significant movement on original rates, with one underwriting source suggesting professional liability and general liability portfolios are typically projecting double-digit rate rises into 2020.
Expectations are growing that casualty excess-of-loss deals will see rate rises in the 10 percent range to reflect mounting severity.
The pace of the renewal has been attributed by some to the timing of retro placements’ completion and reinsurers’ challenges in lining up sufficient capacity, but one reinsurance executive said: “I think brokers are still trying to assess how far reinsurers will go.”
According to one source, Typhoon Hagibis and the challenging ILS fundraising environment have also pushed the typical renewal cycle further back.
The tightening of retro capacity has been at the forefront of renewal events so far, as a combination of trapped capital, stalled fundraising and the withdrawal of Markel Catco has limited capacity that only a few years ago had become increasingly abundant.
On the margins, the exit of several Lloyd’s players has pulled some capacity from the reinsurance market, while aggregate and quota share retro capacity is in notably shorter supply.
Social inflation has emerged as a focal point of casualty renewal discussions, with one reinsurance executive stating that the attention the subject was getting was valid, given considerable levels of under-reserving in the market.
Some sources have talked about the 2016-19 accident years being under-reserved in the US casualty market, while others traced the issues back to 2014.
A source at another reinsurer added that social inflation was more than a talking point, but rather a major driver of trends, where the main question isn’t whether rates are rising, but whether the price increases are keeping up with claims inflation.
Another executive was somewhat dismissive of social inflation, describing the term as “the new buzzword”, believing it to be a euphemism for “under-reserved”. The source went on to highlight that casualty in the US is showing poor results from 2014-2018, and rather than thinking of it as “social inflation”, “under-priced and under-reserved [business]” would be a better way of describing the phenomenon.
One reinsurance executive said irrespective of the emergence of social inflation or the recent primary rate increases, reinsurance rates still had a long way to go.
Social inflation is certainly part of the market’s challenges, but, the executive noted, prices have been falling for a long time. “Even without social inflation, I think we’ve priced the business for too low for too long,” the source said.
“When I talk to clients on a primary basis, they’re very excited that primary rates are up. There’s a long way to go – 10 percent just doesn’t get you back to where you were. People who think it’s a quick correction and we’re back to normal, I just don’t see it.”
Commenting on rates, sources agreed that client “segmentation” continues to prevail over large-scale rate changes sweeping the market.
According to one source, several programmes have been placed at expiring conditions, while a number of placements are securing significant reinsurance improvements in addition to primary rate increases.
It remains difficult to paint a general picture of the market, with price movements driven by region-, segment- and client-specific factors. As one source put it: “There isn’t a global trend yet.”
One Lloyd’s underwriter expressed relief at the direction of rates and the change in momentum. “We’re just happy rates are not going down,” said the source.
Following the theme of differentiation, sources have said loss-free accounts are being treated differently based on the geography of a portfolio’s exposure.
US regional programmes have experienced differentiated pricing depending on their hurricane exposure, with hurricane-exposed accounts getting rate increases whether they’re loss-affected or not.
Non-hurricane-exposed accounts are said to be closer to risk-adjusted flat.
By region, one source indicated that overall, European cat is risk-adjusted flat, with international pricing broadly lagging the US market. Another source described Europe as “very flat”, tallying with predictions made by this publication in October.
“It’s a classic example of supply and demand. It’s so dominated by the Swiss and German big players, which are not reliant on retro so there isn’t the same degree of contagion.”
In the US cat market, sources indicate that most of the accounts completed are focused in the Midwest region and Farm Bureau accounts. One source suggested that these accounts were firm ordering with around a 6-7 percent risk-adjusted rate rise, but another said this was slightly too bullish.
Despite the limited movement on rates, one market participant noted greater resolve among reinsurers at this year’s renewal. “I think that the discussions with reinsurers are much tougher than they were last year.
“I think reinsurers are more willing to walk away from business than they were last year.”
Excess capacity dampening market correction
One broking source said the U-shaped pricing curve was likely to persist for a simple reason: excess capacity in the reinsurance market remains, despite some impact from ILS stress, Lloyd’s withdrawals and issues on the periphery such as Asia Capital Re going into run-off.
On the primary side, several large carriers have recalibrated their underwriting appetite to address underperformance and chosen to deploy capacity in a different way. On the retro side, Markel Catco has exited the market, with significant capacity elsewhere locked and new fundraising efforts yielding little money.
“In reinsurance, capacity hasn’t left the market,” one senior source said. “Despite the catastrophe activity, there remains more than sufficient capacity to cater to the needs of reinsurance buyers.”
Whereas several carriers have pulled back and removed significant capacity from the primary space, working independently to move the market, sources suggest Swiss Re and Munich Re are yet to demonstrate a willingness to walk away from business in a meaningful way. It does, however, remain early on in the renewal season to fully gauge behaviour.
As the renewal approaches, though momentum is on reinsurers’ side, that hasn’t made conversations with broking partners any easier.
As one reinsurer observed: “It's another difficult renewal. Expectations of reinsurers and expectations of insurance companies are relatively far apart. The conversations over the next several weeks will be difficult.”
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