Excess capital, modest loss development from last year’s cat losses and the relatively benign H1 have combined to suppress positive reinsurance rate momentum throughout 2018, analysis from JLT Re demonstrates.
But the broker also noted that such now is the strength of (re)insurers’ capital bases that the industry appears to have undergone a structural change where even major loss events that impact capital will not necessarily turn markets such as in 2001 or 2005.
Despite last year’s cat losses totalling as much as $140bn, the broker noted today at the Monte Carlo Rendez-Vous that average Florida property-cat rates only increased by 1.2 percent at the mid-year renewals, even less than at the 1.1 renewals.
Another factor in the muted loss development last year was the flurry of different events – rather than one or two major losses - which kept more of the losses in the primary markets.
As the broker noted: “History shows, therefore, that the quantum of insured catastrophe losses alone has not been a strong catalyst for reinsurance market firming”.
It continued: “Meaningful pricing corrections have occurred only when losses penetrate deep into reinsurance layers and bring a shock element”.
Referring to the graphic, David Flandro, Global Head of Analytics, JLT Re, said, “This graphic shows the strong historical inverse correlation between the sector’s excess capital ratio and property-catastrophe pricing. During years of constrained dedicated reinsurance capital, considerable pricing pressures have built, whereas supply and demand dynamics tend to cause price declines during periods of significant excess capital”.
He added: “Loss activity is, of course, another crucial factor, although it can be argued that better informed catastrophe risk modelling has, for now, moderated the massive, post-event price swings which were previously common for perils such as North Atlantic hurricanes.”
The broker noted that while this change may be structural - it doesn’t necessarily mean the same as permanent.
A shock element, such as 9/11 or Hurricane Katrina, which causes risk perceptions to change “could still transform market conditions”.