Reinsurance price hikes attract capital amid COVID-19 fallout

Written by Adam Cadle

29/06/2020

(Re)insurance market dynamics including increased pricing, years of accumulating catastrophic losses, investment market losses and the significant losses expected from the fallout of the coronavirus pandemic have led to reinsurers’ push for further price increases, Fitch Ratings has said.

"The environment has attracted increased capital as a result, with the potential for double-digit price increases to extend into 2021. However, the upcoming hurricane season remains uncertain, as does the path and duration of the economic recovery."

Reinsurance prices hardened for June renewals amid lower retro capacity, with all market sectors generally pricing more conservatively. The strength of increased pricing brings reinsurance rates more in line with primary insurance markets, as reinsurers had seen pressure from large property losses, increased liability losses, higher retrocessional pricing and persistently low interest rates, Fitch Ratings said.

Large global reinsurers and Lloyds of London are among the entities with the highest reported estimates of pandemic related losses to date, which reinforces further price hardening in reinsurance and specialty insurance lines. The underwriting response to the pandemic includes tighter terms and conditions, such as virus and communicable disease exclusions and sub-limits in more coverage areas.

June renewal activity is weighted toward property catastrophe coverage tied to the Florida market in advance of hurricane season. Reinsurance rates were up 20%-30% for most Florida renewals, with 50%+ increases for some higher risk accounts. In response to market conditions, influential market participants, Citizens Property Insurance Corporation and the Florida Hurricane Catastrophe Fund, reduced the limits purchased for 2020.

Investment market volatility has not inhibited new capital from entering the market to take advantage of more favourable underwriting opportunities. An estimated $5bn or higher of new equity funds have been raised in the last few months. Publicly traded (re)insurers have raised billions from secondary offerings, while privately held firms have raised capital from existing shareholders, debt issuance and recapitalisation backed by private equity (PE) firms. Additional tie-ups with PE companies and side cars are expected to be utilised to raise and deploy capital and scale existing reinsurers more so than start-ups or new market entrants, which Fitch views as less probable given the inherent challenges.

"While favourable pricing trends are poised to continue in 2021, inevitably this large influx of underwriting capacity will halt this rate momentum," Fitch said.

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