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Is the price right?

November 23, 2017

There is a saying: what goes down must come up.

This has historically been the case when it comes to pricing within the (re)insurance market, with losses from major cat events typically spurring a post-event spike in rates.

However, with greater retained earnings and an influx of alternative capital causing capital levels to rise significantly over the last decade, a number of market observers have recently called into question the traditional supply/demand driven cyclical pricing model, suggesting that the plentiful supply of lower cost money (i.e. alternative capital) could quash the jump in rates usually witnessed post a major catastrophe loss.

But recent reports from carriers and brokers alike have signalled that the traditional model may live on another day, after Hurricanes Harvey, Irma and Maria and a spate of other notable 2017 cat losses prove to be a capital event for some carriers, rather than just an earnings event.

As such, insurers, reinsurers and retrocessionaires will likely be looking to recoup losses by pushing for rate increases in affected lines of business and shift the balance of power back into the sellers’ hands.

Hiscox is among one of the early carriers to call a hardening market and take a bullish stance on pricing, last month announcing its plans to increase the capacity of its Lloyd’s Syndicate 33 by £450mn for 2018 in anticipation of a “widespread market turn” in the wake of a period of significant catastrophe activity in 2017, which is generally estimated to have resulted in more than $100bn of industry losses.

Indeed, a number of Lloyd’s syndicates have followed suit, submitting requests to the Corporation to increase capacity to take advantage of rising rates.

Earlier this month, Hiscox reported that it was seeing rate rises of 10 percent and 50 percent and “sometimes more" on loss-affected and loss-exposed US property primary business, adding that reductions are coming to an end in other London Market insurance lines.

Meanwhile, in its latest “Marketplace Realities” report, Willis Towers Watson predicted that rates for US property cat-exposed risks could increase by 10 percent to 20 percent in 2018, with rises of 20-25 percent for accounts with recent losses.

This comes as increases are likely to trickle down from the top, with a potential reduction in retro capacity and a meaningful increase in retro rates, in turn driving up property cat reinsurance rates and having a knock on effect on primary insurers.

And it’s not just limited to the US or just to property and catastrophe lines. There has already been chatter about expectations of pricing correction spreading outside of the US, and spilling over to other lines of business such as casualty and specialty.  

However, amongst reports of optimism surrounding pricing, there have been those who think there won’t be a big market correction (or indeed those who are pushing for that outcome), with a war of words between carriers and brokers/clients as they try to talk the market in their direction.

Will the market turn and if so, how long will it last this time round? Only time will tell.

At Eames, we will be keeping a keen eye on how the story develops in the industry’s latest chapter.

With this in mind, we are in the midst of completing an in-depth analysis of the talent landscape for the London property cat reinsurance market. If you are interested in learning more about this solution and how we can help you with your talent needs as the story unfolds, or want to find out how we can help you develop other areas of your business, please contact Matthew Eames at matthew.eames@eamespartnership.com or on +44 (0)207 092 3257.