Major unforeseen event needed to fix rates: Fitch panel
A major event on reinsurers’ asset side or an unexpected massive loss event is needed to reverse a decline in rates, as capacity is unlikely to shrink any time soon, according to participants in a panel discussion organised by Fitch Ratings ahead of the Monte Carlo Rendez-Vous.
An excess of capacity in the reinsurance market has been a major driver for price declines in property/casualty lines. Large volumes of funding have flowed into the sector as investors have sought yield in a low interest rate environment. Interest rates are expected to remain low due to muted economic growth as well as low inflation levels. Excess capacity in the reinsurance market is therefore likely to continue pressuring rates.
There is an oversupply in the market and until interest rates go up, prices are unlikely to recover, Philip Tippin, insurance partner at KPMG, said. Market observers expect prices to continue falling, albeit at a lower speed than in the recent past.
For this pressure on pricing to change there has to be an external event on reinsurers’ asset side, for example in the bond market, Michael Van Slooten, Aon Benfield’s head of market analysis, suggested.
Sizeable volumes of reinsurers’ balance sheets are invested in fixed income securities such as government bonds, which are often considered to be relatively safe. Large losses in reinsurers’ bond portfolios could impact the sector’s capital position and drive capacity out of the market, Van Slooten suggested.
Even without a dramatic event in the bond market, reinsurers’ large exposure to this segment may force them to take action to support its financial performance. Reinsurers’ balance sheets are full of fixed income which is facing a huge repricing, said Laurent Rousseau, SCOR chief underwriting officer, EMEA P&C treaties.
Some government bonds have been offering negative yields as investors sought low risk opportunities to park their money. “That’s where the issues will come from,” Rousseau suggested.
The problem is that low investment returns can no longer make up for low rates, Tippin said. Another potential driver for a change in rates could be a non-property event—something unexpected such as a massive cyber loss, he said.
