Renewals negotiations point to 10% US cat rate increases

Renewals negotiations point to a rate increase of around 10 percent in US property cat reinsurance while primary insurance is also witnessing higher pricing, Morgan Stanley analysts said in a research note after meetings with re/insurers.

After record catastrophe losses in 2017 and around 50 percent cumulative rate reduction in the last 5 years, property cat reinsurers will see the first pricing increases in years.

Early transactions ahead of the January renewals indicate 20-30 percent rate increases in retro, 10-20 percent in loss impacted reinsurance contracts, 5-10 percent in loss free US accounts, and 0-5 percent in Europe. The increase also extends to primary insurance and casualty lines. Some re/insurers opined that the property cat market would require 30 percent rate increases or more to achieve adequate returns. Terms and conditions are largely stable while reinsurers could benefit from lower ceding commissions.

Alternative capital could dampen the magnitude and duration of rate increases, the analysts noted. Alternative capital has been a key driver of property cat rate decreases in recent years. Morgan Stanley estimates alternative markets could share $10-20 billion of the estimated $80-100 billion third quarter industry cat losses. The losses and additional buffer in the collateralized vehicles could lock up a substantial portion of the alternative markets, especially in retro. Conversations with alternative capital managers indicate the third party capital providers are willing to reload, according to Morgan Stanley.

“We have also seen new capital looking at potential opportunities post events. However, third party investors are also demanding higher pricing and returns,” the analysts wrote.

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