Download: Rethinking the reinsurance cycle

10 September 2018

JLT Re is pleased to present this reinsurance market report at the 2018 Rendez-Vous de Septembre in what has been an illuminating year for the sector. Following five consecutive years of falling rates, there was much speculation about how the market would react to the most expensive insured catastrophe loss year on record after hurricanes Harvey, Irma and Maria (HIM) formed in quick succession last year to devastate coastal regions of the United States and parts of the Caribbean.

Despite these and other significant losses posing the first genuine test for alternative capital providers and single-state carriers in Florida, the answer has been emphatic. Stability and resilience have defined the market response, defying predictions (by some) of pronounced and widespread rate firming. Although certain classes of business have experienced upward pricing pressure, especially those in loss-affected areas, there has been no repeat of the pricing hikes that followed previous large-loss years and capacity levels have been higher during 2018 than at last year’s corresponding renewals. In fact, rate increases in property lines have mostly subsided as the year has progressed, even though most loss-affected programmes renewed at mid-year.

This JLT Re Viewpoint report examines the reasons behind this outcome and considers why reactions in 2018 have been different to those in previous post-catastrophe loss markets. By analysing the various factors that have traditionally precipitated market turns, it is clear that capital is the dominant reinsurance pricing driver. During years of constrained dedicated reinsurance capital, considerable pricing pressures have built, whereas supply and demand dynamics inevitably dictate that pricing will fall substantially during times of significant excess capital. Loss activity, of course, is another crucial factor, although it can be argued that better informed catastrophe risk modelling has, for now, consigned massive, post-event price swings to the past for perils such as North Atlantic hurricanes.

This goes a long way to explaining the comparatively muted market reaction to the losses of 2017. After years of rapid capital growth, carriers confronted these losses from a position of capital strength; and the ability of capital markets to reload so quickly and smoothly after HIM seemingly confirms a structural change in how capital is provided to the reinsurance market, with third-party capital entering the sector post-loss to fill gaps more or less immediately. The lack of significant adverse development associated with HIM, and limited loss experiences so far in 2018, combined to reinforce the situation.

This is not to say market conditions will remain the same forever. The sector has been through periods of structural change before but has nevertheless remained cyclical. Whilst the potential for a flatter underwriting cycle is clear in the short term, a ‘shock’ event that results in significant risk recalibrations could still fundamentally change market conditions. This is not without precedent. An unforeseen loss that challenges underwriting risk assumptions could still turn today’s supply and demand imbalance on its head. This applies equally to potential macroeconomic changes: a pertinent point as the economic cycle shows signs of shifting for the first time since the financial crisis. The spectre of more volatile movements for inflation and interest rates creates the potential for negative balance sheet impacts.

But as attention starts to focus on 2019 renewals, the outlook looks positive for reinsurance buyers. Strong competition continues to ensure capacity is competitively priced in most lines of business and regions. Equally importantly, the value and efficiency of reinsurance protection is being demonstrated by allowing cedents to react speedily to underwriting opportunities. JLT Re looks forward to assisting clients in this process. By applying cutting-edge analytical tools and bespoke solutions, we are committed to obtaining the best cover and structures available to clients.

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David Flandro: Viewpoint report September 2018

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TRADITIONAL REINSURANCE PRICING CYCLE REDEFINED

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JLT Re Viewpoint: Rethinking the reinsurance cycle

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