Retrocession rates jump up to 20% in January renewals

Rate increases in the January 2018 renewals were lower than expected after the significant natural catastrophe losses of the third quarter of 2017 but retrocession catastrophe programmes increased by up to 20 percent, according to a JLT Re market report.

Although reinsurers sought to stem margin compression with more substantial rate rises at Jan. 1, 2018, many ceded ground to clients as the date neared, particularly in non-loss affected areas, the report said.

JLT Re’s Risk-Adjusted Global Property- Catastrophe Reinsurance Rate-on-Line (ROL) Index rose by 4.8 percent at Jan. 1, 2018, with levels still below those seen in 2016. The highest increases were recorded in the US, with rates renewing flat to up 5 percent for loss-free programmes and up 10 percent to 20 percent 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 percent below 2013 levels, the report noted.

Global market property programmes, such as retrocession and direct and facultative (D&F), typically saw higher rate increases at Jan. 1, 2018, although these also fell below early market expectations. Despite initial indications that markets would push for more, rates for retrocession catastrophe programmes were generally up by between 10 percent and 20 percent 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 programme risk-adjusted rate increases of 15 percent to 25 percent, sometimes more for badly hit layers.

Impacts spread beyond property lines as higher catastrophe and attritional losses influenced renewals for 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, aviation programmes typically renewed as expiring whilst rate reductions moderated for most terrorism accounts. Marine and energy programmes saw rates rise on average due to hurricanes Harvey, Irma and Maria (HIM) and back-year loss deterioration.

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 typically renewed close to expiring levels whilst accounts that experienced losses saw moderate increases. These outcomes were often accompanied by lower ceding commissions. Healthcare classes were mostly flat.

Capacity levels continued to be plentiful across most classes of business at Jan. 1, 2018. Whilst 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.

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