‘Selective property rate firming at 1.1 reinsurance renewal follows record insured catastrophe losses with limited spill over into non-loss affected lines’, says JLT Re

02 January 2018

  • Pricing outcomes varied, with pronounced firming restricted to classes and geographies experiencing highest losses
  • Reinsurers adopted customised approaches to account for long-standing client relationships as well as losses and exposure
  • Dedicated reinsurance capital levels remain more than adequate despite record-breaking catastrophe losses in 2017

After five consecutive years of falling rates, global property-catastrophe reinsurance experienced upward pricing pressure at 1 January, with significant variances across regions. This result was driven in large part by higher loss experience, with the sector suffering its most expensive catastrophe loss year on record in 2017 after hurricanes Harvey, Irma and Maria (HIM) delivered a devastating triple blow to coastal regions of the United States and the Caribbean. The spate of fierce wildfires in California towards the end of the year added to loss burdens and, when combined with other significant events, pushed insured catastrophe losses marginally above USD 140 billion for the first time ever in real terms. With the vast majority of large losses occurring in the United States, a substantial proportion were borne by collateralised vehicles and insurance-linked securities (ILS) markets.

RENEWAL OUTCOMES

Ed Hochberg, Chief Executive Officer, JLT Re in North America, said, “Property-catastrophe rate increases were most pronounced in regions impacted by loss activity, while low single-digit rises or even flat outcomes were more typical for programmes without significant losses. Although reinsurers sought to stem margin compression with more substantial rate rises at 1 January 2018, many conceded ground to clients as the date neared, particularly in non-loss affected areas.”

Figure 1: JLT Re’s Risk-Adjusted Global Property-Catastrophe Reinsurance ROL Index – 1992 to 2018 (Source: JLT Re)

property-catasrophe reinsurance

Ed Hochberg continued, “Figure 1 shows JLT Re’s Risk-Adjusted Global Property-Catastrophe Reinsurance Rate-on-Line (ROL) Index rose by 4.8% at 1 January 2018, with levels still below those seen in 2016. The highest increases were recorded in the US, with rates renewing flat to up 5% for loss-free programmes and up 10% to 20% for loss-affected business. Flat to moderately up renewals were typical for international property-catastrophe business, reflecting more benign loss activity in Europe and Asia. Even with these increases, the cost of property protection remains competitive with global property-catastrophe pricing approximately 30% below 2013 levels.”

Global market property programmes, such as retrocession and direct and facultative (D&F), typically saw higher rate increases at 1 January 2018, although these also fell below early market expectations. Bradley Maltese, Deputy CEO of UK & Europe, JLT Re, stated: “Despite initial indications that markets would push for more, rates for retrocession catastrophe programmes were generally up by between 10% and 20% on a risk-adjusted basis, with event-based programmes falling towards the lower end of this range. Lloyd’s and global D&F catastrophe business was typically more loss-affected, and this translated into risk-adjusted rate increases of 15% to 25%, sometimes more for badly hit layers.”

Mike Reynolds, Global CEO, JLT Re, said, “Impacts spread beyond property lines as higher catastrophe and attritional losses influenced renewals for certain specialty and casualty lines. This coincided with a growing recognition that rates in some of these areas had fallen to levels that tested technical profitability after successive years of declines. As a result, programmes across some specialty lines were renewed as expiring, or with modest rate increases. Negotiations for casualty renewals, meanwhile, were balanced by profitability pressures on original business and reinsurers’ desire for higher rates due to the build-up of claims. Loss-free casualty programmes therefore renewed close to expiring levels whilst accounts that experienced losses saw moderate increases. These outcomes were often accompanied by lower ceding commissions.”

CAPITAL MATTERS

The supply of reinsurance capital continued to drive the market during the 1 January 2018 renewal. David Flandro, Global Head of Analytics, JLT Re, said, “2017 was the first year since 2008 in which dedicated reinsurance capital declined (see Figure 2). The sector’s excess position nevertheless remains high at USD 45 billion or about 17% above gross premiums, having fallen by roughly USD 15 billion during the second half of the year.”

Figure 2: Dedicated Reinsurance Sector Capital and Gross Written Premiums – 1998 to FY 2017E (Source: JLT Re)

Reinsurance Sector Capital

 

“As a result, capacity levels continued to be plentiful across most classes of business at 1 January 2018,” says David Flandro. “While supply and demand dynamics initially tightened in business lines with heavy losses, pressures were offset by post-HIM capital deployments through channels such as new collateralised vehicles, post-event funds, new catastrophe bond issuances and increased stamp capacity and pre-emptions. Investors responded to opportunities in both the reinsurance and retrocession markets, resulting in the replenishment of a significant portion of lost capacity in time for renewals.”

David Flandro concludes, “The reaction of traditional carriers and capital markets to future reserve development and loss experience will be important in shaping the reinsurance market this year. Although the bulk of 2017 losses fell within modelled expectations, there was still uncertainty over the ultimate cost to reinsurers and ILS investors during renewals. This uncertainty was compounded by the recent wildfires in California. Any significant changes to loss expectations in the coming months could potentially affect pricing.”

JLT Re’s Retrospective Renewal Report, which will provide a detailed assessment on renewal outcomes by individual lines of business, is being published on 25 January. To receive a copy, please contact helen.ferris@jltre.com.

[1] JLT Re’s ROL index is risk-adjusted, meaning changes to exposures, as well as premiums, are incorporated.

-ENDS-

ENQUIRIES:

JLT Re
Helen Ferris
Tel: +44 (0)207 5583388
Email: helen.ferris@jltre.com

NOTES TO EDITORS:

About JLT Re

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About Jardine Lloyd Thompson

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