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Reinsurance renewals ‘orderly’ despite big 2017 losses

Posted On: Jan. 3, 2018 2:56 PM CST

U.S. catastrophe reinsurance rates largely stopped falling at Jan. 1, 2018, renewals, but plentiful traditional and alternative capacity put a cap on increases, major reinsurance brokers say.

While some reinsurers were anticipating more widespread rate hikes after the string of hurricanes, earthquakes and wildfires in the second half of 2017 caused total insured losses of more than $100 billion, the losses were spread throughout the market, they say.

Uncertainty over how loss estimates would ultimately develop delayed renewals, said Lara Mowery, managing director and global head of property at Guy Carpenter & Co. L.L.C. in Minneapolis.     

“While renewals were late, the end result was quite orderly … clients’ and reinsurers’ responses were reasonable and well thought out, overall,” she said.

Increases varied and were applied to individual accounts rather than broadly applied across all cedents, she said.

“The market did not say ‘10% increases across the board’” — instead, quotes were tailored to reflect the circumstances and experience of individual insurers, Ms. Mowery said.

Although 2017 was one of the worst years on record for catastrophe claims, the losses resulted from multiple catastrophes that hit a variety of insurers, reinsurers and alternative capital providers, said Mike Van Slooten, international head of market analysis at Aon Benfield in London.

“The losses were very well spread and manageable,” he said.

London-based reinsurance brokers Willis Re and Jardine Lloyd Thompson Group P.L.C. issued reports Tuesday showing limited increases at Jan. 1 renewals.

According to Willis Re, U.S. cedents that suffered catastrophe losses saw increases between 5% and 10%, and accounts without cat losses renewed between flat and up 7.5%.

Loss-hit accounts in the Caribbean saw the biggest rate hikes, with price increases averaging between 20% and 40%, according to the report.

According to JLT, catastrophe reinsurance prices increased for the first time in five years with an average global rate increase of 4.8%. Even with the increase, the average global rate is still 30% below the 2013 average, the report said.

Rate decreases, however, largely disappeared in most lines of reinsurance coverage, and primary property rates saw increases, said James Vickers, chairman of Willis Re International in London. Even specialty markets, such as aviation reinsurance, which has seen steady declines for several years, saw flat or slight increases at Jan. 1 renewals, he said.

Rate decreases were uncommon on property reinsurance accounts, said Ms. Mowery of Guy Carpenter.

“There was much, much more sensitivity to pricing decreases,” she said. Although there were some rare decreases made on a risk-adjusted basis, any perceived decrease was subject to significantly more senior-level scrutiny and need for underwriting justification, she said.

Plentiful capacity before and after the storms kept a lid on increases, brokers said.

“The reality is that there’s a lot of capital in the market and there’s a lot of competition for business globally,” said Mr. Van Slooten of Aon Benfield.

In particular, there is now close to $90 billion in alternative capital in the reinsurance market — through catastrophe bonds, collateralized reinsurance funds, industry loss warranties, sidecars and other reinsurance vehicles — compared with about $10 billion in 2005 when hurricanes Katrina, Wilma and Rita struck the United States, he said.

Prior to the 2017 losses, there was a question about how the alternative capital providers would react, Mr. Van Slooten said.

But now, he said, “We have the answer to that question … new funds and new underwriting platforms are being formed.”

Pension funds and other large institutional investors continue to see insurance-linked securities as an alternative asset class that is not correlated to their other investments and has performed well over the long term, so they have not been deterred by the 2017 losses, he said.

Insurance-linked securities investment managers have managed to secure as much or more funds to write reinsurance coverage since the 2017 catastrophes struck, said Mr. Vickers of Willis Re.

“At the same time, the traditional reinsurers have very, very strong balance sheets, so the market is well capitalized,” he said.

Looking forward, cedents should expect similar market conditions at other key renewal dates in 2018, Mr. Vickers said.

“The January 1 renewal sets the tone for the rest of the year, and cedents renewing later in the year will anticipate that they will be getting the same treatment and no worse,” he said.