Another set of industry analysts is calling for the current upwards trend in reinsurance pricing to continue into 2021, as reinsurers are otherwise looking at continued underperformance as a sector and higher rates will help support their returns on equity (RoE’s).
Reinsurance companies have faced challenging market conditions for a number of years as the low-interest rate environment dampened the performance from their investment portfolios, while reinsurance pricing steadily declined over the last almost decade, helped in part by the rapid expansion of the insurance-linked securities (ILS) market.
Analysts at Morgan Stanley point to these trends and highlight that even with the reinsurance rate increases seen so far at renewals in 2020, reinsurers need more to support better RoE returns, especially as the low-interest rate environment looks set to be prolonged.
While reinsurance rates have already firmed considerably through 2020, having begun to increases last year, with firming accelerating at January, April and most recently June renewals, with the market now looking almost hard, compared to the last decade or so, it’s still not seen as enough by the analysts.
The Covid-19 pandemic has helped to accelerate firming and added additional impetus to reinsurers push for more rate, which has driven rates higher than expected in June.
Further increases are already being seen for broader U.S. nationwide renewals that complete nearer to July 1st, but still this may not be enough for long-term sustainable profits, Morgan Stanley’s analyst team suggest.
Denting profitability for reinsurers have been a range of factors, including elevated weather activity, social inflation and an environment of lower investment yields, in spit of which the rapid expansion of the insurance-linked securities (ILS) market and the inflow of third-party capital has helped to keep pressure up on pricing, the analysts said.
All of which means reinsurance firms have been struggling to achieve or sustain rate adequacy for quite a few years, but this time the market has moved in the favour of the reinsurers, the analysts believe.
Even before the Covid-19 pandemic drove disruption through the market, the need for rate was evident among reinsurers, and the market had been expecting a strong push for higher pricing through 2020’s renewal seasons.
The pressures have not gone away though, but with some of the ILS market’s capacity still trapped due to prior year losses, with more of it expected to be trapped later this year as well, the analysts believe that the reinsurers have an opportunity to push rates higher.
As we’ve been suggesting, the reinsurance market and ILS funds as well as investors are all pushing for a new baseline or floor in pricing to be set, rather than just another spike in rates that declines away over the coming quarters.
The reinsurance market was in need of a more sustainable level of pricing for its products, not just a spike in returns, so the hope is that while rates are unlikely to remain as elevated as they may become, they will not shrink back to the lows seen over the last few years.
Analysts at Morgan Stanley said that while Covid-19 has given the reinsurance market an additional lever to help lift up rates, the reinsurers have also been tightening up their terms, which is also positive for risk-adjusted returns.
All of this leads the analysts to say that, “We expect pricing to continue to rise into 2021 renewals.”
Higher reinsurance pricing is needed to offset the persistent low-interest rate environment and its effect in lowering investment yields for re/insurers and to help reinsurers maintain a roughly 10% return on equity (RoE).
Heightened sensitivity of reinsurers to social inflation and catastrophe losses are key drivers for sustaining the rate increases, the analysts highlight.
While the uncertainty related to the pandemic is another lever that could be what’s needed to lift the pricing floor, rather than just leave it where it is so rates dwindle back in a period of lower major catastrophes.
The hurricane season forecasts for an active year in 2020 also suggest that reinsurers may be incentivised to sustain price increases, or may face losses that provide even more upwards impetus to reinsurance rates for the January 2021 renewals.
The analysts summarise, “Even if we had activity consistent with the last few years, pricing would remain strong and an above active season would fuel price increases even more. Additionally, should we see consistent fallout from COVID-19, price firming could be drawn out even longer.
“We expect reinsurers to account for the slump in investments with pricing increases on the underwriting side. We estimate for every 10bps decrease in yield, 260 bps improvement of the combined ratio is needed to maintain a 10% ROE. Thus, the ability to maintain an overall ROE of ~10% rests on an improved YoY combined ratio, further supporting the case for continued pricing improvement.”
Of course, it’s not just about always getting the best possible price for your reinsurance caapcity. It’s about getting the right price, that enables you to be competitive, covering loss costs, expected loss and expenses, while delivering suitable and sustainable returns to your investors or backers.
Original Article Posted at : https://www.artemis.bm/news/reinsurers-need-rate-firming-into-2021-to-support-roes-morgan-stanley/