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Reinsurance pricing trends still unclear as renewals near

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Reinsurance renewal discussions remained in flux this week as reinsurers, brokers and cedents continue to assess how much an effect the recent string of catastrophes will have on the market.

Losses from hurricanes Harvey, Irma and Maria and earthquakes in Mexico will be added to other catastrophe losses from earlier in the year leading to a significant aggregate loss for 2017, but none of the catastrophes were classified as a market turning event on their own.

Primary insurers have indicated that they will be looking for rate hikes, particularly for catastrophe exposed property risks, but it’s unclear what will happen at Jan 1., 2018, reinsurance renewals, said executives meeting at the Property Casualty Insurance Association of America annual meeting in Chicago earlier this week.

The PCI meeting is the second of the three major European and North American reinsurance meetings — coming after the Monte Carlo Rendez-Vous de Septembre last month and before the Baden-Baden reinsurance meeting in Germany next week — and it is the most important U.S. market meeting for reinsurance renewal discussions.

The Monte Carlo meeting took place as Irma was hitting Florida but before Maria struck Puerto Rico. But more than a month after the Rendez-Vous, it’s still unclear what effect the storm losses will have on reinsurance rates.

“There’s a lot of uncertainty because no one really knows what the losses will develop to. No one knows what the business interruption loss will be in Houston, for example, so there will be a lot of uncertainty up to Jan. 1 and into 2018,” said Doug May, executive vice president of Willis Re in Seattle.

“The industry did a great job in getting out advance payments, but we’ll have to see what the ultimate payments will look like,” said Eric Andersen, CEO of Aon Benfield in New York.

But the level of losses will likely lead to changes in the market, said Steve Levy, president and CEO of reinsurance with Munich Reinsurance America Inc. in Princeton, New Jersey.

“I think given the significant amount of losses the industry is going to recognize this year, we do have to come to grips with future profitably for the sector because the current situation is unsustainable,” he said. “Generally speaking you can expect a difference at January 1, but I think it’s also a longer term issue.”

And increases could go beyond the property catastrophe market, said Chris Buse, head of casualty treaty reinsurance for XL Group Ltd., which does business as XL Catlin, in Stamford, Connecticut.

“Everyone’s playing it close to the vest right now. Everyone’s waiting to see what’s going to happen in terms of the market and how it will change,” he said.

“For most people who write casualty insurance, property/catastrophe has been subsidizing us for at least the last decade,” Mr. Buse said. “The returns for the last five years are really quite low, but we’ve been able to maintain that business because we as a corporation have had this big book of very profitable catastrophe business. Those margins have been eroded over the last five years and that profitability is gone now. Now, casualty has to respond, not because of those big losses but because it’s not subsidized anymore.”

But a lot of capital remains in the market, including alternative capital on the sidelines waiting to come in if prices firm, several executives said, and that could limit increases over the long term.

“Traditional reinsurers were getting an 8%-10% return on equity in loss-free years but that’s not going to be enough for them in a year like this so my sense is that they are going to want to push price … but in the long term, prices will come back down because alternative capital providers don’t have the same return requirements,” said Mr. May of Willis Re.

Collateralized reinsurance funds have made significant inroads in the Florida personal lines and retrocessional reinsurance markets — where reinsurers buy their own reinsurance protection — over the past five years, he said. “I don’t think there’s going to be a supply problem as we are hearing that these fund managers are already accessing additional capital.”

Collateralized reinsurance vehicles are trust accounts created using funds from third-party capital. If there are no losses, the funds and profits are released back to the investors.

Alternative capital investors were not surprised by the recent losses and continue to support the various vehicles — including catastrophe bonds, collateralized reinsurance and sidecars — and in some cases are already in discussions about reinvesting in the market, particularly if prices increase, said David Priebe, vice chairman of Guy Carpenter & Co. L.L.C. in New York.

In the collateralized retro market, investors are reacting differently, said Mr. Andersen of Aon Benfield. “Some of the players are talking about reloading and others are saying they want to continue but they need more price.”

Several executives at PCI said they expect reinsurers to respond to the individual experience of cedents rather than push through broad market increases. And cedents are reviewing the structures of their reinsurance programs in light of the recent storms.

“We are trying to ascertain company by company what losses, if any, they will have in their reinsurance programs and whether the reinsurance programs were structured in a way that met their performance objectives,” Mr. Priebe said.

Insurers with reinsurance programs structured in a way that left them with three or four events that were net retained losses, may face significant financial losses and will not be able to recover much from their reinsurers, he said.

“Assuming a fair price for coverage, they may want to buy more reinsurance. The conversations are starting,” Mr. Priebe said.

While cedents with large losses may face “challenges” at renewal, those with low or no losses may not see big rate increases but they may still want to review their reinsurance programs, said Mr. Andersen.

“We are trying to talk customers through a few things: Did their reinsurance program work the way they wanted it to? Were the attachment points and terms right?” he said. “Some wanted income statement protection and some wanted balance sheet protection. It’s less about the different structures and more about what their goals were.”

Cedents are talking about restructuring their programs, particularly in light of facing three significant, but not huge, hurricane losses, he said. “How much they are willing to pay and how much risk they are willing to assume will be a factor.”

Going forward, reinsurers may offer a broader spectrum of pricing as they make adjustments to their models, said Mr. May of Willis Re.

“Usually, when you have a lot of losses that are not predictable, reinsurers make changes to their models to reflect the loss experience and you get larger divergences in pricing,” he said.