Willis Re: reinsurers adopt ‘rational rating approach’ for April 2019 renewals

Reinsurers have adopted a rational rating approach for 1 April renewals with price increases of up to 25 percent concentrated on loss-affected contracts and programmes, Willis Re has said.

Higher rate increases were “balanced by flat renewals for loss-free classes and programmes”, the insurer added.

In its 1st View report, published three times a year, the reinsurer said that almost all reinsurers have posted improved combined loss ratios for 2018 compared to 2017.

However, it said that this widespread return to profitability has been marginal for many reinsurance firms.

Reinsurers’ pricing changes were prompted by continuing high levels of market capitalisation from traditional reinsurers and insurance-linked securities (ILS) markets, the report said.

James Kent, Willis Re global CEO, said abnormal loss activity in 2018, compounded by 2017 catastrophe loss creep and diminishing prior-year casualty reserve releases, had “adversely impacted” 2018 results. However, he added, reinsurers were encouraged by improvements in primary rating levels across many classes and territories.

“These primary rate increases are filtering into reinsurance pricing, most obviously via proportional treaties. More conservative line-size management is driving much of the improvement in primary rates; in particular, insurers are managing their line sizes on large-commercial accounts. In addition to these efforts, primary carriers are setting minimum rate increases for some lines of business and withdrawing from a number of specialty lines.”

In the report, Kent said many reinsurers had “expressed hope” that the 1 April renewals would show a stronger momentum in price increases than the industry witnessed in the 1 Janaury renewals.

But he added: “In reality, buyers experienced rational rate increases from reinsurers, which were in some cases substantial, on loss-affected business. These rate increases were balanced by flat renewals on non-loss affected classes and programs. There are no emerging signs of generalized hardening rate levels across the market and pricing remains rational. Consequently, the observation from our January 1st View regarding primary rates moving faster than treaty rates still holds true.”

He said the only real limit on reinsurance capacity has been price. Although he added that the Japanese market, one of the largest buyers of catastrophe capacity outside of the US, had bought the bulk of its capacity from major traditional reinsurers, just as it has in previous years.

“The involvement of the ILS markets remained small, but unchanged, with some increase in appetite from funds in a few selected areas. The long- term philosophy of many buyers undoubtedly influenced the overall flat pricing on non-catastrophe loss free classes where parties looked to produce a balanced portfolio based approach.”

The report found that despite the challenges of catastrophes in 2017 and “indifferent” 2018 results, “balance sheets of traditional reinsurers remain strong, and overall interest from ILS investors remains mostly undimmed”.

It said that ongoing “capital overhang”, with supply outweighing demand, was the key driver for balance sheet management via share buy backs at large quoted reinsurers. Kent added: “The message remains clear that in the absence of more attractive opportunities to earn reasonable returns shareholders prefer capital to be returned.”

He said reinsurers had delivered considered, rational price adjustments, which was “a sign of the market’s stability and maturity”.

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