Reinsurance Rates Continued Stabilization Trend at June Renewal; Florida Down Just 3.1%: JLT

June 1, 2016

Reinsurance rate declines continued to slow at the June 1 renewal, reaffirming a trend of gradual price stabilization that first emerged during last year’s June renewal season, according to reinsurance brokerage JLT Re.

JLT Re’s index for Florida property catastrophe rates fell by 3.1 percent this year. This compares to a fall of 8.5 percent at June 1, 2015 and 17.1 percent in 2014.

Average reinsurance rates fell for a fifth consecutive year at the June 1, 2016 renewal, although reductions slowed significantly compared to previous years, according to Bob Betz, co-leader of JLT Re’s National Catastrophe Practice along with Brian O’Neill.

“Risk-adjusted pricing typically fell within a range of flat to down five percent as markets generally held firm against attempts to negotiate higher discounts,” Betz said. “Indeed, efforts to achieve reductions in excess of five percent on any one layer were met with considerable resistance.”

JLT says there was was some evidence of pricing levels converging between traditional and insurance-linked securities (ILS) markets, which represents a reversal of the decoupling trend that first emerged in 2013 when ILS investors deviated from price expectations set by the traditional market.

“This pricing consensus meant most programs renewed within a narrow range of flat to low single digit reductions in 2016, although changes to terms and conditions added to the overall economic benefit of cedents in some instances,” Betz said.

While outcomes by individual programs were determined by historical performance, individual loss activity and terms and conditions, the clear trend of price stabilization was the overriding characteristic of this year’s renewal, according to JLT Re. In addition to converging pricing levels between the traditional and ILS markets, JLT Re said it sees three other developments that contributed to this trend:

  1. Pricing for Florida business is approximately 38 percent down on 2012 levels and only 17 percent above the previous cyclical low of 1999/2000, implying limited scope for further profitable pricing reductions.
  2. Evidence of increased underwriting discipline amid margin compression, deteriorating results, increased catastrophe activity in the first five months of the year and predictions of elevated hurricane activity in the North Atlantic due to the potential onset of a La Niña event.
  3. Stable demand for reinsurance cover (after a significant increase last year) as reduced placements by some state-backed insurers was offset by increased appetite within the private market.
What’s Ahead for Rest of 2016

According to David Flandro, global head of Analytics, JLT Re, even though surplus reinsurance capacity continues to contain any prospect of higher reinsurance rates, the trend towards price stabilization is expected to persist for the remainder of the year, depending on loss activity.

At the end of the first quarter of 2016, JLT Re estimated dedicated sector capital to be at record levels having risen to $321 billion from $315 billion at year-end 2015. The broker said reinsurance supply continues to exceed demand and the market is “awash” with capacity.

“Reinsurance remains a buyers’ market and current conditions present cedents with a compelling opportunity to lower their costs of capital, increase franchise value and pursue more profitable business,” Flandro said. “After one of the most costly starts to the year since 2011 with significant catastrophe losses in the United States, Japan and Canada, and with predictions of an active North Atlantic hurricane season, cedents should consider taking advantage of the competitively-priced capacity currently on offer.”


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