Renewals set to favour buyers but M&A cloud on horizon

With growing competition from capital market investors, upcoming renewals are likely to favour reinsurance buyers, but tough market conditions are predicted to lead to further consolidation and less choice. As reinsurers, brokers and buyers prepared to meet at the 2018 Monte Carlo Reinsurance Rendez-Vous in early September, experts predicted increased pressure on pricing as reinsurers face growing competition from capital market investors. Just one year after the costly Harvey, Irma and Maria (HIM) hurricanes and wildfires in California, reinsurance rates may soon be softening again. Last year’s record catastrophe losses sparked hope among reinsurers that rates would finally rise. However, reinsurance renewals in June and July showed that any rate increases achieved in the aftermath of HIM were already beginning to fizzle out. JLT Re said reinsurance renewals in June and July had fallen below early market expectations, delivering low single-digit rate increases. The broker’s Risk-Adjusted Florida Property-Catastrophe ROL Index increased by just 1.2% this year, while pricing for Florida property-catastrophe business remains 40% down on 2012 levels. Willis Re said momentum for rate increases on loss-free reinsurance accounts dissipated during the June/July property-catastrophe renewals and, in some cases, pricing declined. Renewals in 2018 saw increases in lines of business and territories most affected by last year’s losses, but rate hikes were not of the magnitude following previous large loss years, explained Michael Van Slooten, head of market analysis at Aon Benfield. “In 2017, there was more capital in the reinsurance market and the losses were spread more widely than in the past, with risk laid-off through the capital markets. This is suggestive of a flattening of the cycle,” he said. Meanwhile, primary commercial insurance market pricing is generally stable, according to Marsh. “The global property insurance market continues to be impacted by last year’s losses and we are now seeing increases in financial and professional lines pricing in several regions. However, overall pricing is generally stable across all lines of business and market capacity remains strong,” said Dean Klisura, the broker’s president of global placement and specialties. The consensus is that excess capital and competition from the insurance-linked securities (ILS) markets is curtailing any market correction. The latest estimate from Aon Benfield puts global reinsurer capital at $605bn on 30 June, which is flat relative to the end of 2017. Traditional capital was down by $9bn to $507bn, but alternative capital rose by $9bn to $98bn. Although still early days for the January 2019 renewal, high levels of capital mean the market is likely to remain favourable for reinsurance buyers, according to Mr Van Slooten. “There is a very high level of capital to support reinsurance underwriting. It’s about supply and demand. There is still a lot of appetite from pension funds for insurance risk,” he told Commercial Risk Europe. David Flandro, global head of analytics at JLT Re, also believes rates could fall given current levels of capital: “It is useful to remember that Hurricane Harvey did not make landfall in Texas until 25 August of last year and, of course, last year ended up being the largest insured catastrophe loss year on record. All of this said, given supply dynamics in the sector, if the remainder of the year unfolds as it has up until now, then yes, rates can go lower in areas where capacity is being deployed aggressively,” he said. Adding further pressure to reinsurance rates are extremely low catastrophe losses in the first half of this year, which have further dampened expectations of any market hardening. Ratings agency Fitch expects competition from both traditional and alternative sources to keep pressure on prices in most classes, and believes rate rises are unlikely to maintain momentum into 2019. “We expect alternative capacity to continue to grow in 2019 against a backdrop of significant ILS issuance in 2018 to date, with alternative capital providers replenishing capacity following prior-year losses,” said Graham Coutts, director of insurance ratings at Fitch. Some commentators questioned the commitment of capital markets to keep investing in insurance risk, suggesting that big losses and/or an interest rate rise might cause some to withdraw. However, there was clearly no “capital flight” following last year’s negative investment returns following losses generated by hurricanes Harvey, Irma and Maria. ILS investors quickly replaced capital, enabling them to participate in the 1 January 2018 round of renewals. As a result, price hikes the industry has typically seen after previous catastrophe events were limited, S&P said. “One of the big lessons of the last 12 months has been that there is currently plenty of excess capital standing on the sidelines and that this capital is, in the main, not ‘hot money’, nor will it ‘cut and run at the first sign of trouble’, as some have characterised it in the past,” said Mr Flandro. “On the contrary, roughly $7bn of new capital was raised in the final four months of 2017 alone, with additional capital rising in the first half of 2018. Even at lower rates on line, there is clearly a strong investor appetite for catastrophe reinsurance risk and this should not be underestimated,” he said. This year has already seen a number of insurers acquire specialty insurers and reinsurers. Total announced global insurance M&A transaction volume for first-half 2018 alone was $48bn, according to S&P. Low interest rates and current pricing levels are likely to result in continued consolidation, according to Mr Van Slooten. “Reinsurers will need to optimise everything, from cost and capital efficiencies to maximising access to business. Smaller companies in the reinsurance sector are under significant pressure,” he said. Consolidation may reduce choice and innovation, said Mr Flandro. “The grey in the silver lining is that we now have fewer independent reinsurance carriers than we did ten, five or even two years ago. This can mean fewer options and, in some ways, less innovation, especially as regards traditional capacity. Of course, the broker’s role in all of this is to continue to innovate, across all types of capacity and lines of business,” he said. However, Mr Van Slooten said there are more flexible structures in the cat bond market and new features that benefit sponsors, while larger traditional reinsurers are willing to go the extra mile and provide more bespoke solutions. “Primary insurers will [therefore] get a cost-effective product that is increasingly tailored to their needs,” he said.

Renewals set to favour buyers but M&A cloud on horizon

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