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Reinsurance Pricing "Hardening," According to S&P

Globe-shaped graph with clouds in background and dollar sign in center
June 07, 2019

S&P Global has characterized the current global reinsurance pricing environment as "hardening" following reports that the April and June renewals achieved property catastrophe rate increases ranging from 15 percent to 25 percent on loss affected accounts.

According to S&P, reinsurers have depended upon the US property and casualty market's profitability to subsidize other underperforming lines of business and regions for a number of years. However, "the recent underperformance of property catastrophe in combination with lackluster performance in other lines of business posed a threat to the reinsurance sector's underwriting margins, overall profitability, and ability to earn its cost of capital, thus forcing reinsurers' hand to push for price increases," S&P said.

Continued loss creep from catastrophes in 2017 and 2018 has challenged reinsurance pricing assumptions, said the rating agency. Loss creep has also affected the alternative capital sector, which accounted for, according to S&P, 25 percent to 30 percent of insured losses from the 2017 North Atlantic hurricane season. However, despite a few recent hurdles for alternative capital, S&P expects the sector's growth to pick up again.

S&P noted that for the past 2 years, even with high hopes, reinsurers have not been able to increase rates and "despite the magnitude of the catastrophe losses in 2017–2018, global reinsurance pricing in aggregate was flat to up 5% in 2018 and flat to up 3% during the January 2019 renewals."

Globally, S&P said the April 2019 renewals were largely concentrated in Asia-Pacific, which saw rate increases for Japanese loss affected programs following Typhoon Jebi and reserve strengthening at a level that affected retrocession accounts as well.

For the June 2019 renewals, S&P said a tight supply of alternative capital allowed traditional reinsurers to lead on pricing as well as terms and conditions. Retrocession pricing was able to achieve greater gains with 20 percent to 30 percent rate increases, which, according to S&P, "further highlights the interplay between reinsurance and retrocession pricing."

While the pricing trend looks promising, S&P said a movement to sustainable profitability is still not clear as the sector continues to face challenges.

"Despite the past couple of years' experience, there isn't a reinsurance capacity shortage—neither of traditional, nor of alternative capital. Centralization and optimization of reinsurance purchasing at the enterprise level continue, and growth opportunities are somewhat limited despite [mergers and acquisitions] activity during the past few years. The overall property-casualty reinsurance market remains fragmented and highly competitive," according to S&P.

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