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Reinsurance rates jump as COVID-19 adds uncertainty to market

Reinsurance rates jump as COVID-19 adds uncertainty to market

Reinsurance rates increased significantly during June 1 renewals as underwriters reacted to cumulative catastrophe losses, financial market disruption and expected coronavirus-related losses.

Higher prices could continue throughout 2020 and into next year, some observers say, though continued investment market dislocation and potential natural catastrophe losses could also affect rating levels.

Meanwhile, reinsurers are inserting virus exclusions in reinsurance treaties amid disputes over insurance coverage for COVID-19 losses.

The increase in rates brings reinsurers in line with primary insurance markets, where rates have been increasing for more than a year, and the retrocessional market – which provides reinsurance to reinsurers – where rates have also been increasing. Previously, reinsurance rates lagged, creating a so-called U-shaped pricing curve with reinsurance in the middle.

“The ‘U’ is becoming shallower,” said Mike Van Slooten, head of business intelligence for Aon PLC’s reinsurance solutions division in London.

Before the Jan. 1, 2020, renewals, pressure was already mounting on reinsurers, with increases in liability losses, higher retrocessional pricing and low interest rates hitting investment portfolios, he said.

“When you add all that together and you overlay that there’s a lot of uncertainty over the ultimate claims cost for COVID-19 … it’s no surprise that we are seeing the market tighten,” Mr. Van Slooten said.

Most of the June 1 renewals relate to Florida, where insurers secure reinsurance coverage at the start of hurricane season.

This year, Florida insurers have seen reinsurance rate increases vary from 20% to 60%, on a risk-adjusted or like-for-like basis, said Keith Wolfe, president U.S. P&C at Swiss Reinsurance Ltd. in New York.

“The strongest and best-run carriers were on the lowest end of that spectrum, whereas carriers that had more stress on their operations before the pandemic saw some of the higher-end numbers,” he said.

One factor affecting the market since before the pandemic has been a lengthy lag in claims reporting dating back to 2017 and 2018 catastrophe losses, mainly from hurricanes Irma and Matthew, Mr. Wolfe said.

“Even though they were not considered major events at the time, they became more severe in aggregate as time went on,” he said.

The so-called loss creep created uncertainty over the final tally for the losses, which helped drive up rates this year, Mr. Wolfe said.

During the June renewals, reinsurers talked directly about a hard market for reinsurance business with few qualifiers, and capacity is lower, particularly on the retrocessional side, said Meyer Shields, managing director at Keefe Bruyette & Woods Inc. in Baltimore, who has held virtual meetings with reinsurers in Bermuda and Florida over the past several weeks.

“The U-shaped curve that was such a prominent phenomenon at 1/1 doesn’t seem to be a factor anymore. Right now, all sectors of the marketplace are pricing much more conservatively,” he said.

In addition, retrocessional capacity is entering the market from sources that typically only offer substantial capacity when rates are at historically high levels, Mr. Shields said

“We are hearing repeated references to companies like Berkshire Hathaway and D.E. Shaw playing a role. Their longstanding approach has been to let the market come up to their elevated levels and that’s when they’ll put their capital at risk,” Mr. Shields said.

Private equity firm D.E. Shaw & Co. declined to comment. Berkshire Hathaway Inc. did not respond to a request for comment.

Increased retro pricing, several years of catastrophe losses, investment market losses and potentially significant losses from the pandemic – some market experts predict more than $100 billion in losses – have combined to change market dynamics, said Brian Schneider, senior director for Fitch Ratings Inc. in Chicago.   

“The reinsurers feel they are in a good position to be able to push for price increases,” he said.

And price increases will likely continue during year-end renewals, Mr. Schneider said.

“I would still expect double-digit increases in January, if conditions continue to hold as they are. Reinsurers feel that there’s a need for pricing adequacy,” he said.

But other factors could either raise of lower the pressure on reinsurers over the next few months, said Mr. Van Slooten of Aon.

For example, capital markets may recover, easing pressure on equity investments, but corporate bankruptcies may increase and lead to corporate bond defaults, which would hurt reinsurers’ fixed-income investments, he said.

“And then you have a hurricane season, of course,” Mr. Van Slooten said.

Meanwhile, some reinsurers have inserted communicable disease exclusions in reinsurance treaties that did not have them previously.

The market seems to have “coalesced” around London Market Association wordings, including 5394, which offers a broad exclusion, and 5502 and 5503, which offer limited coverage, Mr. Wolfe of Swiss Re said.

But exclusions vary, Mr. Van Slooten said.

“We are seeing attempts to limit and mitigate the impact on a go-forward basis,” he said, “but it’s down to an individual relationship basis.”

More insurance and risk management news on the coronavirus crisis here.