Rate hikes are on the way for reinsurers and insurers, Morgan Stanley asserts in a new research note, echoing predictions of others in the wake of record catastrophe losses for 2017.

Morgan Stanley bases its analysis on meetings with nine Bermuda insurers and reinsurers, which it said reaffirmed its view that P/C pricing is improving broadly. The firm said that early renewals point to an approximate average of 10 percent rate increases in U.S. property-catastrophe reinsurance, adding that “primary insurance is also witnessing higher pricing.”

Such a trend follows an average 50 percent in cumulative rate reductions over the last five years, plus record catastrophe losses in 2017 stemming from a slew of hurricanes, California wildfires and two Mexico earthquakes, among other disasters.

Morgan Stanley noted that while Jan. 1 renewals have been slower than normal, early transactions suggest a 20 percent to 30 percent rate hike in retro and a 10 percent to 20 percent jump in loss-impacted reinsurance contracts. As well, the firm has tracked a 5 percent to 10 percent increase in loss-free U.S. accounts, with a slight increase in Europe.

“The increase also extends to primary insurance and casualty lines,” Morgan Stanley noted in its research note.

Price jumps could go even higher. Morgan Stanley pointed out that some insurers and reinsurers have suggested that the property-catastrophe market may need rate increases of 30 percent or more to produce adequate returns.

“Terms and conditions are largely stable, while reinsurers could benefit from lower ceding commissions,” Morgan Stanley added.

If rate increases come, their magnitude and duration could be dampened by the use of alternative capital, according to the Morgan Stanley research note.

“Alternative capital has been a key driver of property-cat rate decreases in recent years,” Morgan Stanley said. “We estimate alternative markets could share [$10 billion to $20 billion] of the estimated [$80 billion to $100 billion third-quarter] industry cat losses.”

Hedge funds picked up reinsurance stocks in the third quarter, reflecting a bet, in part, on rising reinsurance rates. Swiss Re Chief Financial Officer David Cole has said that rate increases as high as 50 percent for loss-impacted programs would not be surprising. A number of experts speaking at the Property Casualty Insurers Association of America annual meeting in Chicago on Oct. 17 also said that reinsurance rate hikes were likely.

Source: Morgan Stanley