OUR MARKET TODAY

A delicate balance

Heavy cat losses and secondary perils ensured rising rates were a given for the US 1/1 renewals, but it was the battle between uncertainty and capacity that determined exactly where they landed.


It may not have been all that reinsurers would have wanted but the direction of travel for rates at 1/1 was clear.

“They definitely moved up, and the market as a whole did a good job communicating that. Reinsurers did try to get that message out early that rates were going up,” said T. Kael Coleman, founder and chief executive officer of re/insurance Protecdiv.

But, if that was the overall story, there were a range of different subplots, as Coleman, Ari Chester, head of US and Canada reinsurance at SiriusPoint, and John Huff, chief executive officer of the Association of Bermuda Insurers & Reinsurers, told Intelligent Insurer.

Perhaps the most obvious distinction to be made was between loss-hit programmes and the loss-free. For the former, rate rises of 10 to 20 percent were on the cards; for the latter, perhaps 3 to 7 percent, said Coleman.

Chester writes the property pro-rata and the casualty treaty for the US, as well as working on property cat excess loss business in Bermuda for SiriusPoint. He broadly agreed, although at the upper end. Rate rises for non-loss affected in the US were 5 to 7 percent, and perhaps up to 10; loss effective was closer to 20 percent., he said.

On the casualty side, meanwhile, US pro-rata rates were up 5 to 6 percent, said Chester, although it was more like 10 percent on professional lines.

“A lot of the debate was around the ceding commissions and what they were relative to the rate increase and improvement in the portfolio,” he added.

For some, such rates were not enough—particularly on property, said Chester. Coleman admitted that the rises were probably lower than reinsurers hoped for earlier in the year. There was a ready explanation, however.

“There’s always outside capital looking at our space.”

T. Kael Coleman, Protecdiv

“There’s a lot of capacity,” Coleman explained. “There’s always outside capital looking at our space, so it is hard to move rates up quickly.”

Margins in the market may not be what they once were but they still offer significant outperformance. “If you took all my money and put it into Treasury bonds, you would be doing a lot worse,” he said.

While that continues, rate rises will continue to be dampened, he argued.

An uneven distribution

There are a couple of caveats, however. The first is that the capacity is not evenly spread.

“Bermuda has seen a tremendous amount of investment,” said Huff. That included some startups, but often they were concentrated on specialty areas.

“You see them not even play in some of this property business, which makes a difference to whether you have overcapacity,” he said. There was also differentiation among those who remained, as reinsurers grew increasingly wary of accumulation and the rising toll of secondary perils.

“The 1/1 renewals highlighted capacity constraints on some of the lower layers,” said Huff. The collateralised market also showed some reduced capacity.

Moreover, some sources of capacity looked less robust than others. There was evidence of a “dampening of spirit” on the insurance-linked securities (ILS) side.

“There’s a bit of fatigue among ILS investors. It’s an area to watch,” said Huff.

Two issues might impact supply going forward, said Chester. One is continuing issues over trapped capital. “That’s a structural problem that puts the ILS fund without a rated balance sheet at a disadvantage,” he said.

“There’s a bit of fatigue among ILS investors. It’s an area to watch.”

John Huff, ABIR

The other is simply the decline in returns.

“When you look at the ILS funds and compare 2010/11 to the last two or three years, the risk is still uncorrelated from the capital markets perspective, but the returns have gone from 10 or 15 percent to somewhere between zero and 5 percent,” said Chester.

“Alternative capital is not going away. If conditions improve, it will step back in, but it’s probably not going to increase much more than it has in the last few years.”

More generally, underwriting discipline remains, with reinsurers nervous of rising cat costs.

“This was either the second or fourth biggest cat year, depending on who’s measuring,” Chester pointed out. “Half of that was secondary peril.” On casualty, meanwhile, social inflation continues to be a worry.

Coleman—and his clients—accepts that such concerns and the many unknowns will impact reinsurers. But if reinsurers want that to feed into significantly higher rates, they must share their working and how such uncertainty affects their models.

“Otherwise, it sometimes feels as though reinsurers have a gut sense that prices must go up and then find a reason for it,” said Coleman.

“If reinsurers want brokers and ultimately clients to buy in and believe that these things are fair and right, they have to be transparent.”


To view the full interview visit: intelligentinsurer.com


Images, from top: Shutterstock / Vladimir Zotov


Sign up to the Intelligent Insurer newsletter


Take a trial subscription