Risk-adjusted reinsurance pricing seen neutral to slightly up in 2024: Deutsche Bank
Analysts in the European insurance team at investment banking giant Deutsche Bank are forecasting that risk-adjusted reinsurance renewal prices will be broadly neutral to slightly up in 2024, with the hard market persisting throughout the year.
Deutsche Bank’s analyst team say that it is “well known that the hard reinsurance market will at least continue through 2024.”
The analysts have a base case for risk-adjusted pricing to end up broadly neutral, to very slightly positive, explaining that such an outcome will sustain the current attractive profitability level that reinsurers are experiencing.
On the primary, commercial insurance side, they expect pricing momentum to slow, but rates to remain adequate when compared to loss cost trends.
While reinsurance firms have “won the battle so far in 2023 in terms of relative share price performance” the Deutsche Bank analysts feel a lot of the momentum that has been experienced is now already baked into reinsurer share prices for 2024.
However, they do note that reinsurers are in some cases close to using up catastrophe loss budgets in 2023, despite the higher attachment points of many reinsurance covers, and the fact primary insurers are now retaining a lot of the volatility.
But, despite that fact, the transfer of risk appears appropriate across the industry, when considering how losses have fallen to primary and reinsurance sides, it seems the analysts believe.
Catastrophe loss budgets have been largely exceeded across much of the industry in the last decade and the reinsurers have been first to raise theirs, on a relative basis.
Of course, with primary insurers now retaining for more risk through higher attachments for their reinsurance, as well as reduced frequency coverage, there is likely to be some movement in cat budgets, the analysts feel, while reinsurers have already done a lot of the work required here.
“Presumably, this will need to change… not only because loss experience has exceeded budget in recent years, but also to more appropriately reflect the risk transfer from the reinsurers, in turn, putting incremental pressure on margins,” Deutsche Bank’s analyst team states.
The changing dynamic in catastrophe loss retention and exposure over the last year means there could be some earnings impacts, as primary companies adjust to the new reinsurance reality they face.
“This could put pressure on the combined ratio target going forwards. The question from here will be to what extent primaries can pass on this anticipated impact on margins/loss volatility to their end customer? Given the extent of the price increases recently pushed through to combat inflation, it may prove challenging to justify further increases to combat added loss volatility (not least from a political standpoint in some countries),” the analysts further state.
There’s a chance some primary insurers need more reinsurance in the higher-layers, as they adjust their capital models to cope with the greater retention of frequency losses and attrition.
The necessary adjustments could be made easier by leveraging reinsurance for tail-events to improve the capital position, it seems.
That could present an opportunity for risk capital providers focused on efficient higher layer reinsurance coverage and may also be a driver for additional new sponsors to venture into the catastrophe bond market over the coming year.
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