The recent hardening of reinsurance rates might be a short-lived phenomenon, according to Aon Benfield’s latest Reinsurance Market Outlook report, which analyses the trends observed at the January 1, 2018, reinsurance renewals.
According to the report, while losses were heavy in 2017, new capital has entered the market in large amounts, which could dampen pricing in the medium to long term. In addition the report also highlighted the size of the protection gap, which does represent an opportunity for the industry.
Aon Benfield said that based on current Impact Forecasting estimates, natural catastrophe events caused around $320 billion in economic losses globally in 2017. Insured losses, covered in both the private market and by government-sponsored programmes, were estimated at $128 billion. As a result these losses made 2017 it the third most costly year behind 2011 and 2005.
The report also pointed out that the insurance recovery ratio of 40 percent once again highlights the protection gap evident in even the most developed markets. Similar to 2005, the main driver of losses in 2017 was three Atlantic hurricanes in the third quarter – Harvey, Irma and Maria – which are estimated to have caused economic losses of $200 billion and insured losses of $80 billion.
The end of 2017 saw record-breaking wildfires in California. Although the ultimate size and distribution of claims from these recent events remains uncertain, it is already apparent that they are manageable and well-spread. The continuity and responsiveness demonstrated by the industry has clearly benefitted policyholders, the report notes.
“The scale of the reinsured portion of these losses is difficult to determine, partly because most providers of reinsurance capacity also write insurance business,” said the report. “However, it is clear that traditional reinsurers were well-capitalized going into these events and that, relative to 2005, more risk was being retained by primary insurers and more catastrophe exposure had been laid-off into the capital markets.”
According to the report, as a result of this 2017’s losses have been absorbed without compromising the availability of reinsurance capacity. The report said that recent events provide the first real test of an alternative capital sector that supplied almost $90 billion of capacity in 2017, up from only $10 billion in 2005. Significant funds backing fully collateralized reinsurance and retrocession contracts have been lost or trapped, but investors have responded by showing strong appetite for an asset class that is now viewed as being relatively more attractive.
“The sector has therefore proved its worth and come of age as a committed source of reinsurance capacity,” Aon Benfield said. “Against this backdrop, the January renewals were late, but orderly, with strong competition evident in many sectors. Reinsurance pricing has moved up in lines and territories most affected by recent losses, but we expect this trend to be relatively short-lived, given the amount of new capital entering the sector. This may have long-term consequences for the structure of the reinsurance market.”
Aon Benfield, Reinsurance, Rates, January renewals, Cat losses, Global