Reinsurance pricing could be heading for 'new normal'

Expected hikes in reinsurance prices have failed to materialize in 2018, despite record natural disaster losses in 2017, and analysts at Berenberg believe the industry can no longer expect major tailwind events to apply significant upward price pressure.

In a new report titled "Insurance. Reinsurance. A New Normal", the Hamburg-based investment bank argued the industry should no longer look to high-catastrophe years to boost future pricing.

"In 2017, the favorable catastrophe environment came to an end, with Hurricanes Harvey, Irma and Maria (HIM) in the US and the Caribbean and California wildfire leading to $144bn of insured losses, the highest year of insured losses on record," read the report, citing research from Swiss Re Sigma.

"It had been hoped that the losses in 2017 would lead to an improvement in pricing and an end to the soft market conditions. However, this does not appear to the case. The market remains in a large excess capital position, with HIM being an earnings event for the industry rather than a capital one. The ILS industry has responded rationally, with ILS capacity rising by 10% in 2017 and catastrophe bond issuance actually increasing," said Berenberg.

In Berenberg's view, 2018 has demonstrated that the industry can no longer expect significant pricing tailwinds following large loss events to make up for poor performance in normal catastrophe years.

The firm noted that the P&C reinsurance market has been in a soft state since 2012 as overcapacity in the market has led to repeated rate declines.

"Despite these rate declines, the companies under our coverage have produced strong earnings, driven by a 'goldilocks scenario' of a favorable catastrophe environment, positive reserve development and stable and supportive investment markets," said Berenberg. "As such, despite the challenging environment for the major earnings driver of the reinsurance sector, the shares have performed well, with the four names under our coverage outperforming the sector by 1ppt annualized on a Total Shareholder Return basis from 2012-2017."

Overall, this has led to much rate disappointment in the sector, with rates flattening in those non loss-affected lines with more meaningful price increases in loss-affected lines, and Berenberg does not see this dynamic changing in the short term.

"We expect the pricing environment to remain challenging even for the 1/6 and 1/7 renewals, which will include more loss-affected renewals. Beyond these renewals, we expect that future large loss events in the quantum of those seen in 2017 are unlikely to lead to the same pricing spikes seen in previous cycles. Instead we expect the 'cycle' to be much less pronounced in the foreseeable future, even in the event of significant industry losses," read the report.

"With the companies under our coverage generating 63 - 80% of earnings from P&C reinsurance on average over the last five years, the challenging dynamics in this segment are clearly not helpful," said Berenberg.

The report noted, "Another reason why price rises in response to natural catastrophes are becoming increasing shallow is because price responses now appear to be almost exclusively confined to loss-affected lines."

"Cedants who have not suffered losses are rightfully unwilling to pay more for their coverages in order to cover losses on other accounts. We expect that this will continue to be the playbook, with limited potential for a material hardening in the market in the near term," said Berenberg.