January reinsurance renewals confirm firmer price outlook for 2020 – Moody’s

The January reinsurance renewals indicate that prices will firm in 2020, driven by an industry-wide reassessment of risk and return, rising claims and losses on certain casualty lines, as well as low interest rates and rising retrocession prices.

This is according to a new note published by Moody’s, titled Reinsurance – Global January reinsurance renewals confirm firmer price outlook for 2020.

“The price of property catastrophe reinsurance cover has been rising since January 2018, reversing a decline that began in 2012. However, the increase has not been broad-based, with loss-affected lines benefiting significantly more than loss-free business. The January 2020 renewals were consistent with both of these trends,” states the report.

Loss-affected property catastrophe reinsurance rose across regions, renewing between 0 percent and 20 percent higher, according to reinsurance advisor Willis Re, while loss-free catastrophe prices were flat globally.

Higher prices for loss-free US and Caribbean accounts were offset by declines in Asia (between -2.5 percent and -7.5 percent) and in Europe (between 0 percent and -7 percent).
“The rise in US loss-free catastrophe prices suggests that further increases are likely when the bulk of US reinsurance contracts roll over in July,” said Moody’s.

Casualty reinsurance prices rose, climbing by between 5 percent and 10 percent for European loss-hit lines, and by between 0 percent and 7.5 percent for loss-free contracts. In the US, casualty prices also trended higher, rising by up to 30 percent for certain loss-affected liability lines.

“While rising prices are favourable for reinsurers, their concentration in loss-affected lines - to some extent counterbalancing earlier claims payouts - limits their positive impact on profitability,” said Moody’s. “At the same time, prices across the broader portfolio are still lower than they were before they began to fall in 2012.”

Moody’s expects more broad-based price increases in April and July, the key renewal dates for Japanese and US reinsurance contracts respectively.

“The muted increase in loss-free property catastrophe reinsurance prices at the January renewals reflects their European focus,” said Moody’s. “Europe has not suffered significant catastrophe losses in recent years relative to the US and Japan, and European business therefore gives global reinsurers a significant diversification benefit against the peak peril zones (US and Japan). This lowers their risk adjusted cost of capital in Europe, allowing them to forego price increases that are more urgently required elsewhere.”
It added that a majority of European business is proportional, where pricing trends tend to be steadier.

The modest January price increase for US and Caribbean catastrophe loss free lines was driven primarily by a decline in retrocession capacity and stalled growth in Insurance-Linked Securities (ILS) capacity.

Casualty reinsurance prices increased consistently in Europe and the US at the January renewal, both for loss-free and loss-hit treaties.

“In Europe, the price increases reflected reinsurers’ more conservative assessment of casualty business, especially in markets where claims are rising, and continued pressure on investment returns from low interest rates,” said Moody’s. “In the US, casualty price increases were primarily driven by lines of business where there has been adverse reserve development, and where loss expectations are rising. Liability lines have been affected by higher jury awards for plaintiffs.”

Moody’s added that the outcome of the January renewals is in line with its recent reinsurance buyers’ survey, which predicted an increase in prices for both property and casualty reinsurance.