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Why have reinsurance rates stayed stable after historic catastrophe losses?

Why have reinsurance rates stayed stable after historic catastrophe losses? | Insurance Business

Why have reinsurance rates stayed stable after historic catastrophe losses?

The reinsurance market’s desire and ability to underwrite risks remains healthy, according to global reinsurance broker JLT Re. In fact, the firm has described the market as “broadly defiant […] of post-loss firming” in the January renewal season, despite some market deterioration and sizeable losses in certain casualty lines and the property-catastrophe market.

Loss experiences for reinsurers in 2018 were particularly acute in the property-catastrophe market. Multiple disasters, including hurricanes Florence and Michael, typhoons Jebi, Mangkhut and Trami, flooding in Western Japan and the Californian wildfires, are believed to have cost reinsurers over US$80 billion. According to JLT, last year registers as the fourth most costly catastrophe year ever in real terms and it followed record insured catastrophe losses of US$150 billion in 2017.

After such a formidable period of catastrophe losses, how come reinsurance rates have remained so stable?

“There does remain an abundance of capital and capacity in the marketplace,” explained Pete Chandler, deputy CEO, JLT Re (North America). “It’s really just economics 101. The supply of capital and capacity continues to exceed the demand for that same capital/capacity, and therefore rates are remaining stable, in spite of elevated loss trends. Some of that capital is coming from outside of the industry – CAT bonds, insurance-linked securities (ILS), pension funds, etc. There was a notion a few years ago that these external capital players would disappear when they experienced their first loss, or interest rates and/or other investments provided superior return opportunities. That has not been the case. Even with interest rates where they are today, this is still an attractive diversification play for external capital to come in and take a bet on Mother Nature.”

In the past decade, reinsurers and insurers have become much more comfortable with alternative capital providers and their ability to pay claims. Even after a year of US$150 billion catastrophe losses in 2017, external asset managers continued to approach the marketplace with fresh capital. Chandler attributes this risk appetite to the zero-interest rate environment many of these firms had been subject to, “the ease of entry and exit in reinsurance,” and the low relative correlation of insurance-linked investments to other assets.

“ILS, CAT bonds, pension funds – they’re all becoming more widely accepted as efficient forms of capital,” Chandler told Insurance Business. “Every situation is unique. Each buyer of reinsurance protection is trying to solve a different kind of problem, and, today, there’s a multitude of ways to solve those risk transfer needs. The reinsurance industry is ripe for efficiency-driven disruption as ever-evolving forms of technology and data afford better educated decisions to be made.

“At JLT, we’ve made huge investments into data analytics and technology. These days, the ability to provide clients with strategic financial advocacy is more important than ever, and technology is a huge differentiator in providing those insights. Every company is looking to strengthen its balance sheet through effective risk transfer and efficient use of reinsurance capital. Technology (data analysis, predictive modelling, proprietary forecasting tools, etc.) enables us empirically to frame our advocacy on a bespoke basis while having those conversations with clients, prospects and markets, alike. It’s absolutely table stakes nowadays if you want to compete for business.” 

When it comes to financial risk transfer, insurers are always weighing the balance between internal and external costs of capital. In recent years, the insurance industry has experienced a boom in mergers and acquisitions (M&A), which has led to some changes in reinsurance buying. Some of the very large insurance organisations are potentially buying less reinsurance than they would have in the past because they’ve developed the financial wherewithal (via M&A) to retain more risk net. However, if a reinsurer or alternative capital provider can offer a lower cost of capital externally than insurance companies are able to measure internally, the savvy purchasers of reinsurance are absolutely buying more from those external sources.  

“Companies are looking at their internal cost of capital versus the external cost of capital,” Chandler commented. “If reinsurance brokers can bring more efficient capital to the table, which has good quality and a proven track-record of paying claims, astute buyers will do this trade all day long. That’s something we’re keeping a close eye on at JLT Re. We have an absolute fiduciary responsibility to our clients to make sure we continue to provide the highest possible levels of financial advocacy and efficient capital on their behalf.”