Beazley seeks global rate hikes of 5 to 10% for renewals
Beazley is seeking rate increases of between 5 and 10 percent on all international non-loss affected renewals, and potentially bigger increases on US lines as it looks to improve its return on capital, Patrick Hartigan, team leader, treaty team at Beazley, told PCI Today. Lines hit by losses could go up even more.
He said that after many years of rate decreases, most reinsurers would have been seeking rate increases this year anyway.
The spate of catastrophe losses globally will have simply strengthened their resolve to achieve rate increases, and the firm is also seeking tighter terms and conditions.
Hartigan said Beazley has quoted a lot of business early in Europe. It will now discuss the potential changed with cedants at the next major industry conference in Europe: Baden-Baden.
“Rates had hit rock bottom and even without the recent losses we would still have been pushing for increases,” he said. “The cost of capital will now go up and we will need to reflect that in pricing.
“It is too early to say exactly how cedants will react to this but according to brokers most reinsurers are pushing for rate increases and buyers are not exactly falling off their chairs. They will understand that a healthier return on capital is needed for the industry to be sustainable.”
He added that Beazley was forecasting a return on capital for 2018 in the single digits—before proposed rate increases. “That is not enough. Our investors will want more, and so will investors on the retrocessional side,” he said.
However, the extent of rate increases will be determined by supply and demand. A big driver of this will be the reaction of third party capital in the aftermath of the losses. “We are entering a hard market but this will determine exactly how hard,” he said.
Hartigan speculated that some investors, many of which now have trapped capital in structures while claims and losses are calculated, may become spooked by the frequency and severity of recent catastrophe losses. This, combined with the possibility of interest rates rising, could prompt them to exit the market in favour of less volatile asset classes.
“We have had four hurricanes, two earthquakes and a really bad wildfire in quick succession; back in 2005 there was a similar sequence of events and some people thought this might be the new norm,” he said.
“Some investors may not want such volatility, especially if they can get better returns elsewhere if interest rates increase.”
He added that the reaction of third party capital could be important to the development of the market in a number of ways—one being that some reinsurers are able to write very large line sizes only because they leverage third party capital, either through the use of sidecars or with retrocessional capacity behind them. Their ability to do this could be severely reduced if these investors back away from the market.
This is clearly a concern for some cedants who, for the first time, have been asking Beazley what its gross and net positions are on certain lines. Beazley is not highly leveraged, using only some retrocessional coverage, but Hartigan said this demonstrates the thought process buyers are going through.
“If a reinsurer put down a $100 million line last year and can now do only $20 million, that is going to be a problem for clients. They will have to go further afield to find the same level of coverage.
“It is too early to predict how third party capital will react, but some cedants are clearly considering all possibilities,” he concluded.
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