4 June 2019ILS

Bermuda reinsurance rates up 10-30% at Florida renewals

Bermuda re/insurers have seen substantial rate increases of 10-30 percent at the June 1 Florida property catastrophe renewals on loss-affected accounts, according to research from Morgan Stanley.

Morgan Stanley’s update, ‘Highlights from Bermuda: Positive Momentum in Reinsurance Pricing’, suggested that accounts that have not experienced losses will see more modest price increases of less than 10 percent. Overall risk adjusted pricing is up around 10 points, while rates are still below their 2012 levels.

Meanwhile pricing in primary commercial lines is proving stable, said Morgan Stanley. Overall pricing is up 2 percent in Q1 2019, in line with levels in Q4 2018. Personal lines slowed to 2 percent in Q1, versus 2.3 percent the preceding quarter, but most lines were up between 1 percent and 3 percent, except for commercial auto which was up 7 percent, the transportation industry up 4 percent, and workers’ compensation, down 1 percent.

Retro capacity in the catastrophe market is limited, the research showed. Rates remain unattractive and alternative capital is still tied up from recent events such as Hurricane Irma, which still has more than a year left on its statute of limitations, meaning more claims are likely. Investor doubts about the ability to model California wildfire risk is adding to investor reticence about increasing allocations to the sector.

The loss of CATCo, a big player in the retro market that collapsed under the weight of hurricane claims in March, has added to the tightness in the market.

Alternative capital is adding to the downward pressure on pricing, as providers have a lower cost of capital than traditional reinsurers, giving them a significant pricing advantage. But alternative providers also have returns thresholds, noted Morgan Stanley. This means pricing may not have much further left to fall, following a price reduction of around 50 percent over a number of years.

In its research note, Morgan Stanley said: “While we continue to believe that alternative capital will remain an integral part of the property cat reinsurance market, until retro pricing improves we expect investors to generally remain on the sidelines.”

Allocations to the reinsurance market remain very small for institutional investors in relative terms – less than 1 percent of pension fund portfolios, according to Morgan Stanley. JLT Re estimates there is around $90bn of alternative capital in the market, including things like cat bonds and collateralised reinsurance, representing around 26 percent of global reinsurance capacity at the end of 2018.

Relatively small allocation increases from pension funds could therefore represent significant inflows for the reinsurance market. But while many such investors have been willing to shrug off losses in recent years, and maintain their positions, conditions are unlikely to attract significant growth in allocations.

Global reinsurers could in theory fill the void in the retro market, noted Morgan Stanley, but there is little indication of that happening. “Our checks with SwissRe indicate a muted desire to pick up share in the Florida market at this point,” it said.

Morgan Stanley cited PGR and AIG as the two underwriters with the most growth potential. “While there is some enthusiasm on general pricing in the overall commercial market, our concerns on reserves keep us neutral for most other names in the space,” said the US bank.