Price rises likely unsustainable while alternative capital endures

Rating agency Fitch questions whether the reinsurance market can sustain the rate rises seen at the January renewals throughout 2018 and beyond, as long as capital levels, including from insurance-linked securities (ILS) players, in the sector remain high and excess capacity is there to be deployed.

Reinsurance softening continues, price floor elusive “Intense market competition and the endurance of alternative capital have depressed prices in recent years,” Fitch Ratings explains in its latest report on the Bermuda reinsurance sector.

The Bermuda reinsurance market’s participants are expected to report elevated combined ratios for 2017, averaging around 108 to 109 percent, according to Fitch. This is higher than the 107.1 percent reported in 2011.

Over 20 percent of the 2017 combined ratio is expected to be from catastrophe losses suffered due to hurricanes Harvey, Irma and Maria, as well as other events like the California wildfires.

The heavy toll suffered by reinsurers means that they are keen to hold onto any pricing ground recovered at the January 2018 renewals, but Fitch says the rate rises experienced are unlikely to be sustained.

While the rate rises put an end to the soft market of the last five years, the increases seen at 1/1 were lower than had been hoped for.

Some believe that the mid-year renewals, where much of the Florida property catastrophe market’s reinsurance is renewed, will see a continuation of the rate increases, such as S&P who calls for double-digit rate increases. But Fitch is less convinced.

“The increases look modest and it is questionable whether there will be a longer-term shift to a harder market,” Fitch explained, citing “The still-strong capitalization in the global (re)insurance market and extra capacity from the insurance-linked securities (ILS) market.”

This is testament to the resilience of the reinsurance market, now that it has changed structurally and has a growing and supportive pool of alternative capital providing much of its retrocession, as well as spreading out the impact of major losses, in our opinion.

“The more muted rate increases reflect the structural reality of the reinsurance market in which alternative capital competes directly with traditional capital, thus limiting the extent of cyclical price changes following severe catastrophe loss years,” Fitch explains.

“The improved pricing environment is likely to be short-lived, with additional rate increases uncertain moving into mid-year renewals,” the rating agency continues.