Post catastrophe price rises to hit reinsurers
As global reinsurers' reported losses from Hurricanes Harvey, Irma, and Maria - as well as the Mexico City earthquake - they were convinced that losses from these catastrophes were earnings events, rather than capital events for the sector.
Now, as reinsurers cope with bigger-than-expected losses from monster storms and a devatating earthquake, their capital has taken a hit.
Global reinsurers famously started the financial year with robust capital adequacy - a record US$60 5 billion - including US$89 billion of alternative capital, based on an Aon Benfield report.
This strength has been a harbor in an otherwise turbulent environment.
Now, as reinsurers cope with massive losses, prices will have to increase when as recently as a month ago, the sector was looking a rates softening.
Rate hikes ahead
This abrupt change in opinion came from panelists at S&P Global's latest Global Bermuda Reinsurance Conference.
Beyond how high prices could rise, the larger question is perhaps how far and wide this price hike might spread.
In a poll, nearly half of conference attendees (46 per cent) said they think price increases will affect only the US market, whereas 30 per cent said they expect some spill-over effect to other parts of the world.
XL Group chief executive, Mike McGavick, told attendees that reinsurers' catastrophe-related products have been chronically underpriced for a number of years, and that an inflection point is natural, given the recent events.
"Underwriters are awake to the fact that they were selling their products for less than their cost," he said.
Marc Grandisson, president and chief operating officer at Arch Capital Group agreed, adding that many buyers of reinsurance have resigned themselves to the fact that prices will go up.
"There's a recognition from the community of buyers that there needs to be some correction."
Panelists at the conference confirmed that there will likely be some tightening of terms and conditions as well.
"Either way, the industry may be headed toward one with fewer radical price swings," said Kevin O'Donnell, chief executive officer of RenaissanceRe Holdings.
"What we need to get to is some oscillation around a price that is the right price for the risk we are assuming," he added referring to the industry's history of long periods in which prices continually creep down and then shoot up after an event.
In light of recent disasters, S&P Global Ratings believes that reinsurance pricing will undoubtedly increase for the affected regions and business lines - perhaps by double-digit percentages.
Prior to the catastrophic events, the ratings agency expected a rate fall of up to 5 per cent going into 2018, but now it is expecting a 5 per cent rate increase in global pricing at the upcoming January 1 renewal.
Commenting on the big gap between company-reported losses and industry catastophe loss estimates, McGavick pointed to the "false precision of models."
"The number we put out is what we think is the right number," he said.