ILS supply leads to rate ceiling
There will not be a significant movement in rates for the reinsurance industry at the end of year renewals, Ed Hochberg, chief executive officer of JLT Re in North America, told PCI Today.
“We didn’t see a massive movement after 2017, so I don’t think that we’re going to see one after 2018, barring something else happening,” said Hochberg. “Certainly, in the property cat space, I don’t expect large movements one way or another.
“There’s so much supply in terms of the capacity that can be deployed it creates a ceiling on upward pressure.”
He added that it is hard to see what would reduce the supply. “A significant unexpected catastrophe loss could change things, something that is truly unanticipated; that could help to recalibrate the risk perception,” he said.
Barring that, Hochberg thinks, the market may see some evolution as quantitative easing ends and higher interest rates create more competition for where investors put their money. That could create some abatement of the excess capacity in the ILS sector.
He added that another factor that could move the market was a deterioration in loss reserves. “While we’re seeing some reduction in favourable development, we are not really seeing reserves turn upside down just yet,” he said. “When that happens, we’d expect a retrenchment of capacity across the industry.”
However, Hochberg doesn’t believe that this is the ‘new normal’—the parameters driving the market could change again.
Interest rates will be important, he said. Since the financial crisis of 2008 central banks have kept interest rates very low for an extended period, but that’s beginning to change.
Hochberg said this will create more competition with other financial instruments and that will likely change the appeal of ILS to some degree. In addition, inflation in the market could also change the perception of loss reserves.
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