Swiss Re expects stable rates

Swiss Re expects stable prices for the upcoming January renewals in the absence of any significant events, Moses Ojeisekhoba, head of reinsurance, told Monte Carlo Today.

While noting that it is hard to predict what is going to happen, Ojeisekhoba explained that the dynamics in the marketplace are based on the fact that capital remains fairly cheap.

“Despite the losses last year people were able to raise additional capital. The amount of capital in the market has created elements of distortion in terms of risk premium that some reinsurers are charging,” he said.

Insured losses for the 2017 global natural catastrophe events were estimated at $136.06 billion by Swiss Re Institute’s sigma report, a 186 percent increase from $47.56 billion insured losses in 2016.

Rates increased only moderately during renewals following the losses and were concentrated mainly in affected lines and regions. A continued glut of capacity dampened rate increases in the June 1 renewals for Florida property-cat business, JLT Re noted in a June 1 report. While rates did increase by 1.2 percent, the first rise in seven years, pricing remained 40 percent down on 2012.

An overabundance of capacity at the January and April 2018 renewals had already suppressed rate increases and prevented the type of market reaction that followed other large loss years, the report noted.

Because of market pressures, Ojeisekhoba expects stability in the upcoming January renewals, compared to price developments in the several 2018 renewals rounds.

“Provided no significant event happens, I would expect stable price developments in the markets. The average across the full year 2018 is what I would expect going into 2019,” Ojeisekhoba said, noting that renewal rates can be hard to predict.

“It’s probably not enough on a sustainable, long-term basis. It’s not where we think rates should be,” he added.

The market has seen average price increases between 0 and 5 percent so far in 2018, according to S&P. But in the period between 2012 and 2017, rates have come down roughly 40 to 50 percent, Ojeisekhoba said.

This has consequences for reinsurers. “The return on capital or the return on equity that is generated is not exactly flattering,” he said.

“In the capital market, the general view is still that the return on equity on a sustainable basis is somewhere around 5 to 7 percent. Capital providers, certainly in the traditional space, are expecting returns that are probably above 8 percent and into double digits,” Ojeisekhoba added.

S&P has warned that it might downgrade the outlook for the sector to “negative” if reinsurers’ return on capital falls sustainably below their cost of capital.

Ojeisekhoba sees the main culprit for the inappropriate rate levels as the abundance of capital caused by quantitative easing and low interest rates.

“The issue of capital supply is not restricted to insurance and reinsurance. For me, this is a hangover from the actions that central banks and governments took over the last 10 years.

“The significant easing of monetary policy has resulted in a glut of capital and that capital is searching for returns,” he said.

“When you have traditional models of supply and demand, if you have too much supply, something needs to give on the other side,” he noted.

Cheap capital may go away as central banks reverse quantitative easing and increase interest rates, but this is expected to be a long process.

“The impact of what was done to stop economies going into recession will not be reversed overnight. It will take time,” Ojeisekhoba concluded.