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Re-repeat: the rate slide persists

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Reinsurance renewals have stuck to a familiar theme this mid-year as fierce competitive pressures, excess capacity and a legacy of benign catastrophe years drive down rates yet again.

Reports suggest July renewals have followed the January and April trend, when declines continued but were less steep than a year previous, while Florida June renewals dropped at a faster pace.

In the Australian market there’s little expectation that a strong reinsurance rates recovery will take hold any time soon, despite signs of a modest across-the-board rates recovery in the general insurance sector.

“Reinsurers across the board do not yet feel compelled to take a strong stance over conceding further modest rate reductions and walking away from clients,” retiring Willis Re CEO John Cavanagh says.

“Much now will depend on loss activity in the traditionally more active third and fourth quarters and on any instability in investment returns.”

The declines have continued despite a first-quarter deterioration in many reinsurers’ results.

Underlying loss and expense ratios for many reinsurers show a worrying trend, with combined operating ratios for many classes looking unattractive, the Willis Re 1st View report says.

Plentiful capacity remains the dominant theme of the market, particularly in the case of Florida, where inflows from insurance-linked securities have had a major impact.

JLT Re’s Florida property catastrophe index – a benchmark measure for the US market – slumped for a sixth straight year at the June 1 renewals, with a 5.1% slide outpacing the 3.1% drop recorded 12 months earlier. The June average change was within a range of zero and minus 10%.

“We attribute it to the intense competition between traditional and alternative capital providers, and a recent vendor-model update that has lowered the expected loss estimates on certain natural catastrophe risks,” S&P Global Ratings says in a report titled Deja Vu All Over Again: Reinsurers Awake to Another Year of Declining Rates.

Identifying a bottom to the reinsurance cycle has become something of a market obsession, and theories abound on reasons for the length and depth of the decline, S&P says.

The ratings agency cites abundant capacity and years of modest insured losses as key drivers, with cheaper alternative capital entering the market and crowding out traditional players, especially in lines exposed to natural catastrophes.

“Collectively, these forces have put predictable downward pressure on pricing, which is testing reinsurers’ ability to source attractively priced risks and adapt to the environment,” it says.

JLT Re’s index decline puts pricing for Florida business down about 40% on 2012 levels, and only 10% above the previous cyclical low of 1999/2000.

The broker estimates dedicated reinsurance sector capital reached a record $US325 billion ($428.8 billion) at the end of the first quarter, up from $US321 billion ($423.5 billion) at the end of last year, while premiums totalled $US255 billion ($336 billion) at the conclusion of last year.

A number of years of relatively benign catastrophe levels have continued to weigh on the market, despite an increased loss experience last year.

Fitch Ratings expects soft pricing in the global reinsurance market will continue for at least the rest of this year.

“Even if the cost of major losses returns to its historical average, prices are unlikely to rise materially given the abundance of capital in the sector,” it says in a recent report.

“Catastrophe losses rose [last year] to their highest level since 2012, but were still only marginally above the 10-year inflation-adjusted average.”

The all-important Atlantic hurricane season, from June 1 to November 30, is likely to be more active than normal this year, according to the US National Oceanic and Atmospheric Administration.

Last year’s season was relatively calm, despite the storm count hitting a four-year high. Hurricane Matthew caused widespread damage, but mostly followed an offshore path before making landfall with reduced Category 1 force in South Carolina.

“While Hurricane Matthew came close last year, no major hurricane has made landfall in Florida or the US since Wilma in 2005,” JLT Re North America CEO Ed Hochberg says.

“The return time of an 11-year stretch without a major hurricane landfall across the US coastline is in excess of 300 years, reminding us that such good fortune cannot go on forever.”

Mr Hochberg says reinsurance offers an extremely efficient form of capital following the recent declines, giving insurers potential to secure future profitability by preparing for the next market-changing event.

Guy Carpenter notes some signs of improvement amid the continuing downward trend.

“In light of the magnitude of previous market movements, pricing decreases were generally moderate and in some classes flattening, despite significant excess capacity,” Global Head of Property Lara Mowery says.

S&P maintains a stable outlook on the sector despite the difficult scenario for reinsurers, pointing to sophisticated enterprise risk management programs, strong capital adequacy and, so far, rational underwriting.

Reinsurers are pursuing various strategies to endure the weak market, including mergers and acquisitions, expanding primary insurance operations and moving away from more commoditised catastrophe-exposed lines to more complex risks.

Some are using the soft market to add protection cheaply, writing less business in line with reduced opportunities and returning excess capital to shareholders.

Areas for growth can also be found, including the US mortgage reinsurance sector and emerging lines such as cyber and terrorism risk.

But with the market generally showing little sign of turning around, reinsurers’ performance will come under closer scrutiny.

“If reinsurers start underpricing risk to grow aggressively, especially in softer lines of business, we will likely take negative rating actions,” S&P warns.

It’s a mixed bag for reinsurers, hemmed in by ratings agencies anxious they don’t get too enthusiastic, encouraged by a continuing flow of capital looking for something profitable to invest in, and driven by opportunities to grow business in an expansive market.

The old belief that capital will flee the reinsurance market once a couple of major disasters strike is no longer valid. Reinsurance is a far more sophisticated and flexible entity than it was a few years ago.

But the recent record of a benign claims experience coupled with abundant capital resources should not lead to investors relaxing. Investing in reinsurance has rarely looked as secure as it does now, but no one knows what’s around the corner.

That’s what makes reinsurance such a permanently uncertain proposition, and ensures it’s always going to be a game for organisations with reserves large enough to ride over the inevitable dips.