Reinsurance renewal rates are likely to trail initial market expectations in January 2018, as the anticipation amongst reinsurers of major price increases have declined somewhat since the third-quarter reporting season, according to analysts at Keefe, Bruyette & Woods.
The reinsurance market has been pushing for major rate increases at the January 2018 renewal season following the extensive industry losses suffered from hurricanes, earthquakes, the Californian wildfires and other catastrophe events suffered this year.
Rates had been anticipated to rise as much as 20% or 40% across some loss affected reinsurance and retrocession markets, with lower 5% to 10% rate rises across other U.S. property catastrophe reinsurance renewals and even some major players calling for low single digit rate increases more broadly across the market.
But expectations are declining, according to KBW's analysts who have been meeting with reinsurers and finding that the companies are less bullish in their forecasts for rate increases at the renewals.
At a recent meeting with Validus executives, the analysts were told that the company expects that reinsurance rate increases will likely trail the expectations that had been laid out during the third-quarter earnings calls.
However, real data on where rates are going is minimal, so far.
There has been some indicative pricing on a number of major reinsurance programs, pointing to price rises but certainly not as significant as had been hoped for.
There has also been some catastrophe bond pricing, which suggests a small rate increase across that market, but again not reflecting the levels of rate increase that major reinsurance firms had been predicting.
As a result of the growing uncertainty over rate increases, the market is "all waiting to see who blinks first" the analysts said.
Validus reports retrocession prices increasing around 20%, loss affected account property catastrophe reinsurance rate increases rising by between 15% and 20%, and lower increases for non-loss affected accounts, which it believes averages it all out to 8% to 10% rate increases overall.
That's not that far off expectations, but only encompasses the rate increases across catastrophe exposed and loss affected regions. Our sources suggest rate increases elsewhere are being fought for, but are not always manifesting at where reinsurers would have liked to see them, so far.
It's no real surprise that the rate expectations that reinsurers tried to set at the third-quarter reporting juncture are unlikely to be met.
Numerous companies have called for steep increases and there has certainly been an element of attempting to talk up price increases and trying put off other new capital providers, especially alternative, from trying to enter the market at this time.
But the upshot of all of this is that there will be price increases at the January 1st 2018 reinsurance renewals, but they may not be as high as some would have liked, nor will they likely be long-lived without other major losses to drive increases.
The renewal looks to be very late in 2018, with different price expectations making it hard for any early signings to get done and some brokers we've spoken with saying that the market is eerily quiet, given the time of year.
KBW's analysts said that a late renewal will probably favour the buyers, given the abundance of traditional and alternative capital still. Although the market would hope that it favoured sellers, who may be holding back in the hopes of pushing buyers to accept terms and rates they dictate.
Again, that could lead to disappointment at the renewals for some, as there is unlikely to be any shortage of capacity it now seems.
Competition is likely to remain very high for signings and even though significant amounts of ILS collateral remain trapped, the capital markets are set to remain a very strong influencing factor on rates through January 2018 and beyond.
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