Global reinsurance pricing was, once again, only flat to up about 3% in aggregate during the January 2019 renewals--mimicking a similar scene from a year ago that played out during the renewal season in January 2018, says S&P Global Ratings.
This was despite insured losses of about $80bn caused by natural catastrophes in 2018. S&P estimates that about a quarter of the 2018 global insured Nat CAT losses would end up with the reinsurance sector.
As a protagonist of this year's rerun, alternative capital continues to influence reinsurance pricing, property catastrophe in particular, notes S&P in its new report “For Global Reinsurers, The January 2019 Renewal Season Was A Deja Vu Story”. Despite third-party capital's rapid growth pausing for now, S&P thinks it's temporary and its ascendance will likely continue.
The global reinsurance sector continues to weather unfavourable and continuously difficult business conditions. However, for the next 12 months S&P Global Ratings maintains a stable outlook on the sector and on the majority of the reinsurers it rates.
To defend their competitive positions, reinsurers have pursued transformative and tactical bolt-on acquisitions while enhancing their value propositions, a trend S&P expects will continue in 2019. In addition, mergers and acquisitions absorbed some of the weaker competitors.
In general, reinsurers' strong enterprise risk management programmes and overall relatively still-disciplined underwriting contributed to the industry's good earnings through the first nine months of 2018. On a pro forma year-end 2018 basis, S&P expects reinsurers' capital adequacy to remain robust and supportive of its ratings.
Rising interest rates mostly in the US have somewhat improved net investment incomes. Moreover, inflation remains under control in most developed economies. Favourable reserve developments have improved underwriting results during the past several years, despite the loss creep some reinsurers experienced on 2017 catastrophe losses during 2018. S&P expects the benefits from favourable releases will continue, although at a significantly declining pace reflecting historical soft global reinsurance pricing.
At the same time, the negative impact on US GDP growth from the federal government shutdown, uncertainties related to Brexit and global trade, and continued market volatility with increasing risk premiums will add to an already challenging business environment for the reinsurance sector.
Regionalisation of reinsurance pricing
In general, the 1 January reinsurance renewal process was orderly but late in certain instances, as reinsurers were still evaluating the potential impact from the 2018 fourth-quarter catastrophe losses.
During the recent renewals, S&P saw more and more regionalisation of reinsurance pricing. In other words, the international credit agency no longer witnesses a rising tide that lifts all boats, but rather, targeted price increases limited to policies and regions that were affected by losses without any spillover effect to other lines of business or regions.
Given that the natural catastrophe losses in 2018 mostly emanated from the US and Japan, S&P expects a slightly stronger picture to emerge from the April and June/July renewals than that witnessed during January 2019 renewals.