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BOSTON – Reinsurance rates will likely increase at Jan. 1, 2020, renewals as primary and retrocessional prices also rise, a panel of experts says.
Increased costs borne throughout the market from substantially higher liability awards and low interest rates crimping investment returns should result in average rate increases for multiple renewals, they said.
Loss-affected accounts and accounts that had previously experienced the biggest rate declines are seeing the largest increases, said Steve Levy, president and CEO of the reinsurance division at Munich Reinsurance America Inc. in Princeton, New Jersey.
But the increases are “badly needed” given the losses that the insurance and reinsurance industry has faced over the past several years, he said during a panel discussion at the American Property Casualty Insurance Association conference in Boston on Tuesday.
“On a current-year basis, the industry is generating a return on capital that is barely meeting its cost of capital,” Mr. Levy said.
At the same time, loss costs are increasing as liability settlements and awards increase by multiples, he said.
With loss cost trends increasing and low interest rates hitting investment returns, “the industry really needs to have rate increases for at least a couple of years if not longer,” Mr. Levy said.
Munich Re expects moderate rate increases for most lines of business during year-end reinsurance renewals, he said.
“This market change is being led by the insurance companies; it’s not being led by the reinsurers,” said David Priebe, chairman of Guy Carpenter & Co. LLC in New York, who moderated the panel.
However, the rate increases are not “a blanket change happening, it’s going to be very much tailored to each client’s situation,” he said.
Increased liability awards – so-called social inflation – are rising at rates that have not been seen before, said David Marra, senior vice president and chief underwriting officer at RenaissanceRe Holdings Ltd. in New York.
The higher awards hit commercial auto first but are also affecting other liability lines, he said.
“In the past, $1 million was a big award for a commercial auto loss but now every time a truck hits something or something hits a truck, a $5 million or $10 million limit’s in play,” Mr. Marra said.
In addition, simple cases that a few years ago would likely have been dismissed by a judge on summary judgment, are now being allowed to proceed, said Mike Mulray, Philadelphia-based chief underwriting officer at Everest Insurance, a unit of Everest Re Group Ltd.
“So that drives up your defense costs … and we are trying to adjust our behaviors to address it as best we can at the front end,” he said.
Reinsurers also are seeing higher retrocessional reinsurance costs as some capital markets investors pulled back alternative market capacity after suffering losses from catastrophes in 2017 and 2018, Mr. Levy said.
“There’s clearly been a tightening of retro capacity,” which will likely lead to higher rates in the retro market “and knock-on effects in the property cat market as well as the property market on the primary side,” he said.
Global reinsurance capital increased 8.0% to $559.0 billion at the half-year point of 2019, compared with year-end 2018, according to the latest Reinsurance Market Report from Willis Re Inc., the reinsurance business of Willis Towers Watson PLC.