Reinsurance reserve releases have been slowing over recent quarters for many in the sector, with the fourth-quarter of 2015 seeing more reinsurers reporting smaller releases, rather than larger, a trend that analysts at Keefe, Bruyette & Woods expect will continue.
Reserve releases have been providing a much-needed boost to reinsurer returns during the softening of the market over the last few years. With catastrophe losses minimal and each year having been benign, in terms of major industry losses, since 2012, the expectation has always been that releases would slow down.
Now KBW believe that fourth-quarter 2015 results may have reflected this, as releases have slowed at more reinsurers than they have grown at.
In fact even the world's largest reinsurance firms are facing a slow-down in reserve releases, with Munich Re reporting yesterday that it expects 2016 will see lower reserve releases, due to the continuation of a benign catastrophe loss environment.
Munich Re also said that it had released particularly a particularly large amount of reserves during 2015, something other reinsurers had also been doing up to Q4, as they looked to augment results with the use of reserves from prior years that had seen a greater amount of catastrophe experience.
But as the years of low losses continue the ability to replenish these has diminished, meaning that a natural slowing of the contribution to results from reserves was to be expected.
Analysts at KBW explained that they believe that the Q4 slowdown in reserve releases "reflects sustained reinsurance pricing headwinds that typically translate into less conservative reserving."
The analysts forecast that this trend will continue, particularly for reinsurers underwriting lines of business which continue to be the most squeezed in terms of pricing, such as specialty lines like energy and aviation risks.
With pricing pressure sustained but not worsening as markedly in property catastrophe reinsurance anymore, the analysts do not highlight this as an area that will see less conservative reserving, although the lack of major events means reserves may not amount to very much at all.
One area that KBW's analysts highlight as a real concern is casualty reinsurance.
"We expect the industry's "mass migration" into Casualty lines," the analysts forecast. The reason for this is that pricing is still under less pressure in casualty reinsurance than in catastrophe or specialty, despite many larger reinsurers having already shifted more of their focus to casualty business.
This "mass migration" is expected to intensify the pricing pressure and rate decreases in casualty reinsurance renewals in 2016 and beyond.
So does the casualty reinsurance market risk becoming a crowded trade, in the current environment where reinsurers are looking for underwriting business that provides a reasonable return?
It's possible, as reinsurers have been actively expanding into casualty risks for some time, hiring teams and making preparations to grow their portfolios in casualty risk.
Also with the proliferation of startup ventures looking at longer-tailed risks, with an investment oriented or total return reinsurance business model, there is now a growing amount of perhaps more efficient capital looking to underwrite in the casualty market.
KBW does offer a word of caution though, saying that the migration into casualty risks could result in reserve surprises for any reinsurers for whom the casualty class of reinsurance business is not yet a core competency.
And of course as reserves may become more risky, as casualty is added perhaps by less experienced underwriting, and the remaining reserve releases from other lines continue to slow, it would not take much for a reinsurer to face negative returns.
So once again two things come to mind. First the efficiency of underwriting capital, a factor that can really make a difference and actually help reinsurers (or ILS players) to be more disciplined as more efficient capital can sustain lower rates for longer.
Secondly, discipline is absolutely vital at this point in the reinsurance market cycle. Migrating into casualty risk is a strategy that should not be taken up lightly and similarly reserves need to be treated with respect, not used as a foil to softened reinsurance pricing.
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