• Thursday, February 22, 2024
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Analysts lose hope for reinsurance rate increase July

Eight months into insurers recapitalization no mergers yet

Market expectations for rate increases across the July 1 reinsurance renewals may not be met, according to analysts from Deutsche Bank, who while expecting positive rate movement say increases may not be as high as hoped for.

Reinsurance renewals hope or despairAfter strong rate increases seen at reinsurance renewals in April and June this year, the market expectation has been for continued strong price rises in July.

But analysts generally and our sources have pointed out that while April and June saw regions where there had been significant loss activity and continued loss creep renewing, namely Japan and Florida, the July reinsurance renewal features more global and national type accounts renewing, suggesting that upwards pressure may be more muted.

Deutsche Bank’s analysts say that as a result the price impact for the big European reinsurance firms they track may be muted in July, perhaps with rates only tracking a similar level of increase as a year earlier, when the impacts of hurricanes were being absorbed by the market.

“We, therefore, see a risk that the outcome of renewals could disappoint some investors with higher expectations,” the equity analysts explain.

The analysts went on to explain that the effect of improvements in individual businesses, like Florida catastrophe risk, can be significantly diluted by the well-diversified portfolios of the European reinsurers.

Which means while rate increases will be available, they may not bump up the overall average market rate very much at all and the analyst team say to “expect price increases of 1.5 – 2% during July renewals”, similar to the levels reported in 2018 after the 2017 Harvey, Irma and Maria hurricanes.

Another reason for the rate response being more muted for the major European reinsurance firms is the fact they are underweight Florida and U.S. coastal catastrophe risks, in the main.

Unlike ILS funds and other insurance-linked securities (ILS) investment vehicles which given their appetite for cat exposure are benefiting more from the overall portfolio rate increases, it seems.

However, we’re told that nationwide U.S. reinsurance business should see increases at July 1st renewals, to the benefit of those reinsurers and also ILS funds that target this business.

But this may not meet the expectations of equity investors in the space, as the analysts suggest the pace of rate movement seen so far this year may now be set to slow down.

Of course, this slowing of rate rises may purely be optics, as the underlying business conditions and terms may improve as well, making the risk-adjusted returns better.

After the impacts of the wildfires in California, loss creep from hurricane Michael now emerging, as well as the erosion of aggregate layers, it’s likely the market will be seeking a stricter line on terms at this renewal, which could raise the underlying risk-return, even if the price itself isn’t flying.


Modestus  Anaesoronye