Is This the Bottom of Reinsurance Cycle? Opinions Vary at Rendez-Vous

By | September 13, 2016

It may be wishful thinking – but some major reinsurers are hoping the bottom of the reinsurance cycle is at hand.

Both Swiss Re and Hannover Re told journalists at this year’s reinsurance Rendez-Vous de Septembre in Monaco that they expect price levels to stabilize in 2017.

“We expect price erosions to stop in the near future. We believe we are close to the bottom of this market cycle and maybe we have reached it already. We don’t know for sure,” said Matthias Weber, group chief underwriting officer, Swiss Re, during a press conference.

This is true for natural catastrophe business as well as liability, he said, noting that reinsurance rates are stabilizing and rate increases can be expected if the industry’s reserve adequacy deteriorates.

“We believe it’s just a matter of time until this happens,” Weber said. “It has happened already in some markets and in some segments…”

He pointed to the example of motor business, which has seen prices starting to harden, although the percentage of increases vary by market.

“The second quarter of this year was a reminder that natural catastrophes can happen in clusters, and this experience, combined with several years of decreasing prices, shows that the industry cannot be too far away from the bottom of the cycle,” said Swiss Re in a statement.

Christian Mumenthaler, Swiss Re’s group CEO, echoed Weber’s statement, saying “the bottom is near.” With such market conditions, Swiss Re will focus on underwriting discipline and on “large tailored transactions, which are typically done outside the renewal season.”

For the Jan. 1 treaty renewals, Hannover Re said it expects to see greater stability overall in both prices and conditions, as a result of the growing pressure on returns as well as the sharply increased burden of attritional losses.

“Opportunities are available here for rate increases, for example in Germany and Canada, following the heavy losses incurred in some instances as a consequence of natural catastrophe events,” said the company in a statement.

“It is evident that reinsurers strive to prevent any further drop in the price level. This was already reflected in a considerably more muted price decline for the renewals in the first half of 2016. What is crucial for us in this situation is to only write business that satisfies our margin requirements, even if this leads to lower premium income,” said Chief Executive Officer Ulrich Wallin during the company’s press conference.

Looking at Bottom

Speaking at their own press briefing, executives at JLT Re that the market is looking at the bottom of the reinsurance cycle.

In many lines, pricing levels are “getting close to minimum technical levels,” said Ed Hochberg, CEO North America, JLT Re.

“Some reinsurers are assessing things and they’re saying, ‘I am not covering my variable costs when I write this next contract,'” he said. So they’re looking to withdraw capacity – but not everybody has the same view yet.”

Nobody knows for sure if the bottom of the market has arrived, “but we’re far closer to it now than we were three or four years ago,” said David Flandro, global head of Analytics, JLT Re.

And what will make the market harden? Both Flandro and Hochberg believe it will require a confluence of events, such as reserve inadequacies, interest rates rising and a catastrophe loss – even a moderate cat loss.

“But it would have to be all those things,” said Flandro. “People associate the last hard market with Hurricane Katrina,” but it was actually a combination of the dot.com bust, the liability crisis and Hurricanes Charlie, Ivan, Jeanne, Katrina, Rita, Wilma along with rating agency pressures. “It was a majority of those things together that created the hard market. We do need a confluence of several events again.”

In the next article from this year’s Rendez-Vous, the JLT Re team discuss the issue of reserve adequacy, or potential reserve inadequacy, in the current market.

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