Reinsurance rates fell for the sixth consecutive year at the June 1, 2017 renewals, according to a market commentary published by JLT Re.
JLT Re cited its Risk-Adjusted Florida Property-Catastrophe (ROL) Index which fell by 5.1 percent this year. This was within a range of zero to negative 10 percent and a greater average reduction than last year’s decrease of 3.1 percent, the broker said.
“Pricing outcomes were more varied than usual as markets continued to differentiate by cedent,” the commentary added.
Excess capacity and ongoing competition among traditional and insurance-linked securities (ILS) markets were instrumental in driving rates down – particularly for some of the more attractive risks, the report said.
“Specifically, renewed vigor by ILS markets to deploy capital was notable this year as they looked to increase participations, particularly with stronger performing cedents,” said JLT Re, noting that losses from Hurricane Matthew had little effect on renewals even for those cedents that had losses in their lower layers.
“While the pace of average rate reductions accelerated at June 1, 2017 compared to last year, the results were very much determined by cedent size and performance,” said Bob Betz, executive vice president, JLT Re in North America, in a prepared statement.
“After a difficult 18 months for the Florida insurance market, where attritional losses and mounting litigation related to assignment of benefits (AOB) claims contributed to approximately 40 percent of state insurers suffering underwriting losses in the first quarter of this year, smaller companies with capital surplus of less than US$25 million in particular have come under increased rating agency pressure,” he added.
“At a time when markets are focusing on performance, these carriers generally saw less favorable outcomes in both price and reduced line size,” said Betz.
The latest rate decrease means pricing for Florida business is now approximately 40 percent lower than 2012 levels and only 10 percent above the previous cyclical low during 1999/2000, JLT Re’s commentary said.
Excess supply and relatively muted demand at the June renewals managed to offset the effects of reinsurers’ deteriorating underwriting performances in the first quarter of 2017, the result of “significant reserve charges following changes to the Ogden discount rate in the UK and a number of global weather-related events,” the report said, citing localized U.S. convective storm events and Cyclone Debbie’s landfall in Australia.
Retrocession prices were also down during the June renewals, the report said.
An abundance of capacity, along with a lack of significant losses, meant that rates for retrocession placements typically fell by mid-single digit percentages on a risk-adjusted basis, said JLT Re, explaining that recent catastrophes such as the Fort McMurray wildfires and Hurricane Matthew had a limited impact on retrocession programs.
Demand for retrocession cover remained strong overall as most cedents sought to take advantage of market conditions, which are now at their most competitive since the late 1990s and early 2000s, the report said, noting that the Florida reinsurance market is heavily supported by retrocession cover.
As a result, some carriers lowered retentions and added additional layers of coverage, while others became more specific and moved from worldwide covers to Florida only, the commentary said.
Further, a number of reinsurers also bought more occurrence coverage and less aggregate cover during the June renewals, the report confirmed.
Market Driven by Excess Capital
“Despite elevated loss experiences, reserving volatility, inflationary and interest rate concerns and declining reinsurer returns manifesting so far this year, excess sector capital continues to drive the market,” said David Flandro, global head of analytics, JLT Re.
“Surplus capacity is enabling cedents to negotiate discounts to expiring reinsurance rates, although renewal outcomes at June 1, 2017 were very much swayed by cedent performance and size,” he added.
At the end of the first quarter of 2017, JLT Re estimated dedicated reinsurance sector capital reached record levels, rising to US$325 billion from US$321 billion at year-end 2016. Premiums, on the other hand, were US$255 billion at the end of 2016, which has created “a reinsurance market awash with capacity as supply continues to exceed demand,” the report noted.
“While Hurricane Matthew came close last year, no major hurricane has made landfall in Florida or the United States since Wilma in 2005,” according to Ed Hochberg, chief executive officer, JLT Re in North America.
“The return time of an 11-year stretch without a major hurricane landfall across the U.S. coastline is in excess of 300 years, reminding us that such good fortune cannot go on forever,” he said. “In fact, some forecasts now indicate the 2017 North Atlantic hurricane season could see above average activity.”
After six consecutive years of softening prices, reinsurance offers an efficient, cost-effective form of capital, which can help secure profitability “by preparing for the next market changing events(s),” Hochberg affirmed.
Source: JLT Re