January renewal to be very late, u-shaped, with property cat relatively flat

January 1st 2020 is expected to be a very late reinsurance renewal, with pricing moving the most at either end of the market in primary and retrocession, but reinsurance in the middle looking less exciting, leading analysts at JMP Securities to suggest property catastrophe renewals could be flat overall.

The market dynamic hasn’t changed too much in recent weeks, with those closest to and furthest away from the risk seemingly able to command the largest price increases. However, things are beginning to move and some deals are getting done.

JMP Securities’ analyst team met with underwriters in London to discuss reinsurance renewal market conditions and found that while there are pockets of the market that look more exciting for 1/1, the hopes of many are lying on better rate increases later in the year. First, the u-shaped pricing environment. While property and casualty lines of business are improving everywhere, the analysts note that still it is the primary business and retrocession seeing the largest rate improvements, while reinsurance in the middle seemingly set to benefit less from the effects of loss activity.

Reinsurance rates are often the last to move, being the area with the most capacity and capital attracted to it, but this year the stress has mainly been felt at the retro end of the market, while primary risks are undergoing something of a repricing, leading to a lagging reinsurance rate environment in some cases. January 1st 2020 is set to be a “very late renewal” the analysts believe after speaking with London market underwriting and broking sources.

Reinsurance companies are struggling to get their retro in place, while those insurers facing rate increases are also facing a realisation that pricing means their budgets may not stretch to the coverage they need. This is leading to a rethink around structures, something our sources have also explained to us, as re/insurers that rely on capacity from reinsurance and retro need to adjust strategies to find a cost-effective way to secure what they need.

The analysts believe that this trend could continue and become worse as 2020 continues, with rate increases expected to be more pronounced at April and June/July renewals, which could push execution of renewals back even further in many cases. The mood in the market is upbeat, the analysts said, with some even saying they can name their price in retro and specialty lines. It’s less upbeat in casualty risks, where fears over loss-cost trends are becoming increasingly prevalent.

But January 1st may not deliver the renewal boost that many were hoping for and this is especially the case in the middle of the market, the reinsurance segment where rates are still not moving as fast as in primary or retrocession, the analysts said. They call the renewal market dynamic “relatively unexciting from a rate movement perspective” reflecting the mix of large European, U.S. and global accounts, many of whom have not collected on their reinsurance in recent loss years and so are expecting flat pricing at worst.

The large, global reinsurance players exert their influence here as well, particularly in diversifying regions such as European programs, where rates are barely above expected loss levels and so unattractive for alternative sources of capital in the main. The analysts gauged market sentiment as European catastrophe risks looking flat to down, U.S. cat risks looking flat to up, “suggesting to us the property cat reinsurance market at January 1 could be flat overall,” they explain.

Price acceleration is being seen in some casualty and specialty lines though, leading the analysts to say that overall the renewals could see casualty/specialty rates rising in the mid to upper single digits at the renewal, while catastrophe rates are largely flat across the renewed business. The catastrophe reinsurance market seems to be fickle though, with some reporting to us that they are achieving acceptable rate increases in specific pockets and layers of the market, particularly where relationships are strong and long-term.

Looking further ahead, the analysts expect that April, when Japanese reinsurance programs renew, will see much better rate increases available, with increases in excess of +20% possible. Market estimates suggest +30% to +35% for Japanese wind risks, some said even higher. At the mid-year renewals, discussions ranged around rate increases of +20% to +40%, the analysts said, driven largely by continued adverse development of hurricane losses. It’s quite typical for market chatter to talk up much higher rate increases than actually manifest when it comes to renewal time, but these are relatively bullish ambitions even at this early stage.

However, the analysts said differentiation is again going to be key and performance will be everything, with those programs that have passed on losses being the ones facing the largest renewal price increases. “We expect the theme of differentiation to once again be at the forefront as reinsurers allocate the most capacity at the best price to those insurers that have demonstrated an understanding of the exposures in their book while those that most widely missed the mark will likely be punished with reduced capacity and much higher pricing,” the analysts explained.

Retrocession in general is seen as up by 10% to 30%, depending on where in the risk tower capital is being deployed. The analysts confirmed what we said last week, that some major retro players are back and active in the market, including Berkshire Hathaway and DE Shaw. “While pricing is up significantly, we are not confident in it having a ton more upside, as rated paper has started stepping into the pension fund void,” the analysts explained.

As these gaps in capacity get filled the retro renewal market has begun to see layers getting placed, suggesting many will be okay, at least filling the base of their programs in time for January 1st. It remains a challenging environment though and for ILS funds and collateralised reinsurance players it is important to be selective and pick your opportunities, with most sticking with programs where long-held relationships matter.

The ILS market will be looking to April and the mid-year renewals in hope of better rate increases once again, it seems, although some seem largely pleased with what they are achieving this January as well, when we speak with fund managers. The final area of interest is the reinsurance sidecar and quota share slice of the market, which is still facing some challenges and investors are being particularly demanding on rates, we understand.

However, the large and established sidecars are getting placed, we understand, while the smaller and less well-established are not seen as being quite so integral to sponsors retro or reinsurance programs and in some cases could be foregone, if they cannot find agreement on price. With negotiations continuing to heat up and intensify, the January 2020 reinsurance renewals look set to be a particularly interesting one, in terms of dynamics, but whether rates prove as interesting after the fact, remains to be seen.

Source: Artemis