Reinsurers expect profitability to rise in 2018

Reinsurance rates are poised to improve in 2018 as a result of the significant 2017 catastrophe events, particularly on US property catastrophe lines and in the retrocessional market – that is according to many of the executives who we interviewed for our year-end questionnaire.

The extent of these increases, however, and the impact on capital in the sector is unclear, said Brian Schneider, senior director, Fitch’s Insurance team.

Fitch expects that excess capital in the market and the absence of an even costlier event, such as a hurricane making direct landfall in Miami that could have been the case with Irma, leads to less certainty over more widespread rate rises.

“A key driver of the magnitude of future rate increases also depends on ILS market appetite to invest more capital into reinsurance,” said Schneider. “The amount of capital that remains ‘trapped’ by lengthy claims settlements or protracted litigation, particularly in relation to Hurricane Harvey flooding losses, will also influence the degree that rates rise”.

Demand for reinsurance is likely to increase as a result of the recent hurricanes. Hurricane Harvey, in particular, is likely to stimulate greater demand for flood cover, for which a significant portion of losses were uninsured.

Insurers may also seek to purchase more aggregate reinsurance cover or manage specific exposures through per-risk or facultative cover. This increase in demand in combination with a potential constraint in supply is likely to contribute towards an improvement in rates across US catastrophe-exposed lines of business, which may also extend to non-US or non-catastrophe-exposed business, Schneider noted.

Fitch forecasts a calendar-year combined ratio of 96 percent in 2018, reflecting an average level of market catastrophe losses of eight points on the reinsurance combined ratio in 2018, down from 22 points in 2017. Prior-year development on reinsurance segment reserves should remain favourable overall, but decline slightly to about 4 points in 2018 as redundancies subside.

Fitch projects the underlying accident-year combined ratio excluding catastrophes to improve slightly to 92 percent in 2018 as reinsurance market pricing appears to have reached a bottom in 2017 and is expected to turn positive in 2018. Fitch expects a net income return on equity of 7.1 percent in 2018, just above the estimated 6 to 7 percent cost of capital, as both underwriting and investment results remain under pressure.

Kelly Lyles, chief executive, Client & Country Management, Insurance, XL Catlin, commented: “For too long margins have been thin and, year-on–year, were getting thinner. I think we are in a transitional market where serious conversations about the sustainability of the market are taking place. Here, dialogue is paramount; every client is different and each conversation will reflect that, but these conversations with clients and brokers are critical as we move into 2018 together.”

The US property catastrophe rates are expected to increase between 5 percent and 10 percent in aggregate at the upcoming renewal periods, according to estimates.

“At the forefront in 2018 will be the US property/casualty industry’s reaction, on a variety of fronts, to the weather-related events of 2017,” said John Andre, managing director, AM Best.

"Chief among these issues are the potential for changes in catastrophe pricing and terms and conditions and the related impact on primary company retained exposures, and whether alternative reinsurance capital will remain a viable reinsurance option for the industry,” Andre continued.

Other areas to watch include rate increases by primary companies for home and auto in both the affected and unaffected geographical areas, the implementation of stricter underwriting standards/restrictions on coastal, flood and wildfire prone business, the impact of commercial market participation in flood business; and changes and enhancements to catastrophe models, Andre noted.

“It also remains to be seen whether business interruption (BI) and contingent BI policy language will be less ambiguous following hurricanes Harvey, Irma and Maria than it has been following other events,” he added.

The re/insurance industry is hoping for higher rates after several years of rate reductions, creating what is referred to as a soft market. This was mainly driven by excess capital and the absence of large losses.

“2018 may represent a turning point for the P&C insurance sector,” said Benjamin Serra, vice president and senior credit officer, Moody’s.

“Insurers reported good profits in the last five years, but competition is very tough while claims are increasing, and we could see some deterioration in profits going forward, especially if inflation comes back in 2018 with rising interest rates,” Serra said.

“Increasing inflation could also affect reserve releases which contributed strongly to results in recent years,” he added.

For life insurers, adaptation to low interest rates will be the continued focus of the industry, Serra noted. Insurers will continue to change their business mix and adapt their asset allocation. However, as insurers want to accelerate changes in business models, acquisitions or disposals are a solution that many insurers will envisage for 2018.

Asta CEO Julian Tighe sees a positive year ahead for the Lloyd’s market. “Rates are rising, if only slightly, and we see the likelihood of more profitable business arriving from international markets, driven both by new and existing syndicates,” Tighe said.

“Lloyd’s clearly remains a very attractive platform for the international industry, given its significant advantages of rating, licensing, and capital efficiencies, and we regularly field enquiries from people who want to get involved. In addition, market modernisation is advancing on many fronts, which will continue to make Lloyd’s a more attractive place to do business.”

The modernisation work under the banner of the London Market Target Operating Model (TOM) continued 2017. PPL, the electronic placement platform, has been launched transporting data through quoting to binding, and beyond. About 10 percent of market business is now being placed electronically and by the middle of 2018 all lines of business will be live. PPL provides benefits to both brokers and underwriters as it limits rekeying.

Structured data capture also went live in 2017. This will eventually allow data to flow directly to carriers’ systems. All market reform contracts and lines of business are now live and further document types (e.g. endorsements and schedules) are under consideration.

For the first time a global data standard for risk information can be used not just in London but across the entire global insurance market. And there is now a data glossary, which is being used by firms across the market.

“MGAs are a growing positive influence, we believe, because they fill a gap in the market, and often bring in business that is inaccessible through conventional distribution channels,” Tighe noted. “If they were able to come more under Lloyd’s brand, they would become an even more important part of the overall market.”

This is just a snapshot of what executives told us in our Christmas questionnaire. For the full comments from all 16 executives that took part in our survey, please click here.