Massive storms, wildfires and other catastrophes wreaked havoc on communities, the economy and the insurance industry in 2018. But they won’t be enough to drive up property-reinsurance prices in 2019, brokers and executives say.
Reinsurers provide insurance to other insurers, covering losses from disasters if damages reach a certain contractual threshold. Natural and human-made catastrophes caused an estimated $79 billion in insured losses in 2018 and $150 billion in 2017—the worst two-year period on record, according to Swiss Re.
In the past, large disasters would typically trigger a wave of price increases through the industry. But as negotiations for 2019 contracts progressed over recent weeks, insurers appeared less willing to pay reinsurers more for property-catastrophe coverage.
“Reinsurers are trying to push the pricing, which is similar to what they did last year, but I don’t think they’re going to be able to get it,” said Kapil Bhatia, managing director at Raymond James & Associates.
Globally, property catastrophe reinsurance prices for contracts that renewed Jan. 1 slipped 1.2%, brokerage JLT Re said in a report Wednesday. But for accounts that experienced catastrophe losses last year, prices rose by as much as 20%, according to brokerage Willis Re, a unit of Willis Towers Watson.
The reason for the overall price decline is an oversupply of capital. Pension funds, endowments and other large investors seeking diversification and higher returns have plowed billions into catastrophe bonds and other insurance-linked securities over the past decade, allowing insurance companies to turn elsewhere for help paying claims after hurricanes or earthquakes.
The absence of dramatic price raises might not immediately affect profits because reinsurers have built up large cushions to pay claims. But the trend could hurt these companies over the long term if more catastrophes occur.
Reinsurers were confident that property-catastrophe reinsurance prices would increase by 10% or more in 2018 after three major hurricanes and other disasters. Ultimately, price increases were limited to about 6%, according to Guy Carpenter, because investors poured billions more into insurance-linked securities.
Negotiations for this year’s property-catastrophe reinsurance contracts dragged out longer than usual, market participants say, because of disagreement about pricing and the disclosure that regulators are scrutinizing a major fund that sells insurance to reinsurance companies. Insurers were also resisting paying more for reinsurance in parts of the world that didn’t experience big losses in the past two years, like Europe.
At least $150 billion in reinsurance premiums, or a bit more than half the global total, was expected to renew on Jan. 1, according to broker JLT Re.
“I equate it to a Mexican standoff,” said Andre Perez, chief executive of Horseshoe Group, a financial services company focused on insurance-linked securities. “Nobody wants to move.”
Reinsurers were hoping for prices to increase the same amount as 2018 or more. One major concern is how much recent disasters will cost, especially the wildfires that blazed through California in November. Claims can continue to be filed months after an event, and the cost of claims can rise from initial estimates. Insurers and reinsurers have repeatedly increased their estimated losses for the 2017 hurricanes.
Another unknown is how the largest investors will behave. Investors might be cautious about allocating more money to insurance-linked securities this year, market watchers say. A portion of their investments from 2017 and 2018 are locked up until claims from those years have been paid, restricting the amount that can be rolled over into new deals.
“Investors are a little disappointed that this is the second year in a row” of major losses, said Morton Lane, president of consulting firm Lane Financial LLC. “They’re not quite sure that they want to pull out, and they’re not quite sure they want to commit to the new deals that are coming forward.”
The biggest price increases occurred in the retrocession market, which is where reinsurers buy insurance. Markel Corp. said Dec. 6 that its subsidiary Markel CATCo Investment Management Ltd., an investment fund that sells retrocession, had been contacted by regulators in Bermuda and the U.S. about its 2017 and 2018 loss reserves.
CATCo had about $6.8 billion in assets under management earlier this year. Market participants said they were uncertain how much capacity is currently available for reinsurers looking to buy retrocession coverage.
CATCo said it has raised new capital for 2019. Prices in the “retro market” could rise by 20% to 30%, said Alissa Fredricks, CATCo’s Bermuda CEO.