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Despite tough talk, Europe may see few reinsurance rate hikes at Jan. 1

Reinsurers hoping for price increases in Europe at upcoming renewals may be disappointed.

Some market participants predict that rates will remain largely unchanged, but the picture is complicated. Capacity levels are pushing down on prices even as recent losses, U.S. casualty woes and a capacity crunch in the retrocession market are applying pressure in the other direction.

The Europe-dominated renewals at Jan. 1 each year are a key feature in the reinsurance industry calendar, with roughly half of the world's reinsurance business renewing on that date.

Several prominent reinsurance CEOs have insisted that prices, in general, are not high enough even after the industry saw rate hikes on loss-affected lines during 2019's key renewal dates. But there are signs that in Europe, where there have been few catastrophe losses in recent years price, rate increases at Jan. 1, 2020, are unlikely.

Tor Mellbye, reinsurance manager at Swedish insurer Länsförsäkringar Sak Försäkrings AB (publ), anticipates prices to be "risk-adjusted flat" at the next renewal. In an interview he said reinsurers would be compensated for any increase in exposures, but "that's really it."

Kieran Angelini-Hurll, reinsurance CEO at London-based broker Ed Broking Group Ltd., agreed.

"Even though the reinsurers have tried to be quite tough, I think it will get to a position where [the market] will be flat or down, which the clients will be happy with," he said.

Capacity glut

While a dearth of natural catastrophes in Europe gives reinsurers fewer reasons to raise prices, the strongest impetus for the existing flat trend is the continuing abundance of reinsurance capacity, according to Mellbye.

"There is plenty of capacity. You might say no to a few players and then choose others and you manage quite well in the renewal as a buyer," he said.

Catastrophes are not the only thing that can lead to higher reinsurance prices. A lack of capacity in the retrocession market, which reinsurers tap to lay off their own exposures, can also push premiums up. Much of this capacity is provided by capital markets investors, some of whom have exited or cut back after the heavy natural catastrophes in 2017 and 2018. If retro capacity becomes scarcer or more expensive, it often follows that so does reinsurance.

But this is not happening, according to Angelini-Hurll. He said this is partly down to the fact that on a given retro program, there is typically a narrower range of providers offering quotes than in the traditional reinsurance market.

"The problem with reinsurance is that there are lots of quoting markets, lots of people are still very keen," he said. "And depending which territory, is still seen as an area where people want to grow."

However, Angelini-Hurll does see potential for the increases in retro pricing to influence reinsurance rates in later renewals, including the Japan-dominated April 1 renewals and the Florida property-focused June 1 date.

"I think [increasing retro prices] might have a knock-on effect later in the year but we're not seeing it particularly at Jan. 1," he said.

Many moving parts

Several other factors stand to determine the outcome of the upcoming renewal season. While there is ample reinsurance capital in the market, the quieter outlook for interest rates and the resulting expectation of lower investment returns supports the idea of "a bit more discipline on the underwriting side, because there is still that pressure to cover the cost of capital," said Mike Van Slooten, head of market analysis in broker Aon PLC's reinsurance solutions division.

Van Slooten pointed to increasing concern about the adequacy of U.S. casualty reserves as a potential pressure on the industry's underwriting results. Some U.S. insurers, including Travelers Cos. Inc., took hits to earnings in the third quarter of 2019 for strengthening casualty reserves. Start-up insurer Convex Group Ltd. CEO Stephen Catlin told the audience at a conference in November that the industry had a hole of between $100 billion and $200 billion in its casualty reserves.

"There is a growing question mark around some of the trends in U.S. casualty business and what that might mean for reserving going forward," Van Slooten said. "There's a main takeaway is that I don't think reserve releases are going to be the same support to earnings as they have been over the past decade or so."

While catastrophe losses, reserving issues, retro price rises and interest rates may not be enough on their own to have an influence on pricing, when combined they "create the sense that people have to be very focused on their underwriting return going forward and there is a general sense that that will tend to reinforce discipline," Van Slooten said.