Negotiations will be tough after Florida rate declines
Negotiations around the year-end renewals will be tough for reinsurers, with downward pressure on rates driven partly by the influence of the recent influx of alternative capacity into the market.
That is the view of Ulrich Wallin, chairman of the executive board at Hannover Re, who says that he observed a shift in mentality in the industry following the Florida renewals in June. Up to that point, he says, rates had been successfully defended by reinsurers but things have changed recently and this will have a bearing on the year-end renewals too.
“The renewals at the start of the year and at the end of the first quarter were OK on rates – there were no major changes and we successfully defended the levels set in 2012. But there is overcapacity and the Florida June renewals changed things.
“Rates did reduce and it changed the psychology of the market. Up to that point, underwriters had still been pushing for increases and if they failed, that was seen as OK. Following the Florida renewal, there was so much talk and publicity around rates declining, that became almost the expectation in the market. If there are no major losses, the 1/1 2014 renewal will be a tough one with downward pressure on rates.”
He says the supply and demand dynamic in the market very much suggests rates would decrease but countering this will be the persistently poor yields on the investment side of the business. “That means the combined ratio has to be below 90 percent and that will bring more discipline into the market.”
But the days of industry-wide cycles that once characterised the industry have gone, says Wallin, who says that the last time the industry saw a homogenous cycle when rates were aligned across the board was in in the late 1990s.
“The market was very soft at that point. Then, the terrorist attacks of September 11 happened and almost all classes of business went very hard. Since 2003/04, there has been an underlying softening in the market but different lines have experienced their own cycles during this time.”
He notes that after some of the heavy hurricane-related losses in 2005, the affected classes of business saw rate increases yet the unaffected classes continued to soften through 2006. The financial crisis triggered some hardening, but again in a more fragmented way with certain lines very hard and other lines almost neutral.
Many market participants believe one of the reasons for the less severe swings in pricing is the growing use of risk models and a greater understanding of the risks by the industry – dampening the previous swings driven primarily by levels of capacity.
“You tend to see things move line by line and market by market these days – despite an underlying softening in the market, there are pockets of business where we will see price rises.”
He notes, for example, that severe floods in Germany will trigger rate hikes in that market while Canada has experienced its biggest ever losses this year and he also anticipates rate hikes in that market as a result.
“It is a very diverse picture. Yes, there is underlying softening but, within that, different markets will respond in different ways to specific loss events,” he said.
For reinsurers, Wallin says, the important thing is to look to grow at the right times in the right markets and then hold firm on rates when conditions do become more challenging. Hannover Re, he says, grew its property/casualty book in 2009 after rates improved after the financial crisis and in 2012 after the heavy losses of 2011 triggered increases.
“But in other years it is less important to us to grow,” Wallin said. “We grow at the right times and then take our foot off the gas when it is not right.”
