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Reinsurance capacity remains plentiful ahead of June renewals

Posted On: May. 7, 2019 7:00 AM CST

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Reinsurance buyers can access ample amounts of capacity heading into mid-year renewals, even in the wake of the first reported decline in industry capital in four years, observers say.

With June 1 renewals focused largely on U.S. wind-exposed risks, however, the past two years’ substantial losses could weigh on some accounts, even as recent April renewals, which include significant renewals for Japanese accounts, presented a limited harbinger of things to come.

France’s Scor SE reported gross written property/casualty reinsurance premiums up by 9.6% at April 1 renewals, with rates on catastrophe programs in Japan up nearly 15%.

Reinsurance markets responded “rationally,” Scor said, adding that “the April renewals reaffirm the positive trends observed in January.”

“I think the April renewals, while a favorable sign, are somewhat independent of June renewals,” said Brian Schneider, senior director at Fitch Ratings Inc. in Chicago.

“April saw increases of 15% to 25% on loss-affected programs and flat to up 7.5% on loss-free accounts,” Mr. Schneider continued. “However, this renewal is Japan-focused, which has more of a traditional payback mentality and less of an (insurance-linked securities) influence than the U.S.”

Japanese insurers experienced significant catastrophe losses in 2018, including Typhoon Jebi in in August, which caused about $8.6 billion in insured losses, according to the General Insurance Association of Japan.

Lara Mowery, Minneapolis-based head of Guy Carpenter & Co. LLC’s global property center of excellence, agreed that the April 1 renewals are not indicative of June 1 renewals.

Still, both the U.S. and Japan markets did sustain heavy losses recently and thus share some attributes, other experts say.

Reinsurers have recently sustained heavy losses from natural catastrophes in both markets, noted Mike Van Slooten, head of business intelligence for reinsurance solutions with Aon PLC in London. “Reinsurance renewals have become increasingly sensitive to individual territory, line and client experience,” he added.

While there is some upward pressure on rates, there is also ample supply in a market that recently saw its first reported drop in capital since 2015.

Reinsurance capital dropped 3% to $585 billion in 2018, the first decline since 2015, according to an report from Aon PLC last month, as traditional equity capital declined by 5% to $488 billion as alternative capital rose 9% to $97 billion.

“There are selected areas of decreased deployment of capital based on reevaluation of risk metrics and pricing adequacy,” Ms. Mowery said. “These vary by market and cannot be generalized other than to say loss development, assignment of benefits and loss adjustment expense issues are putting upward pressure on hurricane-exposed pricing.”

“Florida property insurers are vulnerable to reinsurance rate increases, given three straight years of hurricane losses — Michael in 2018, Irma in 2017 and Matthew in 2016 — and significant loss creep from Irma due in part to assignment of benefit issues that complicate claims resolution,” Mr. Schneider said.

Available capacity, however, remains plentiful.

“Most of Florida business has yet to renew this year and could still see significant capacity coming from the capital markets,” Mr. Schneider said. “The drop in traditional capital was driven more by (fourth quarter 2018) investment results that have rebounded in (the first quarter of 2019). When combined with alternative capital, supply remains abundant and is more than sufficient to meet somewhat increased demand.”

“We believe supply is down a bit and demand is up a bit, so the gap has narrowed, but there is still excess capacity in the industry,” Mr. Van Slooten said.